Healthcare Realty Trust Incorporated
Consolidated Statements of Cash Flows
(Amounts in thousands)
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Year Ended December 31,
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2017
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2016
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2015
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OPERATING ACTIVITIES
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Net income
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$
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23,092
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$
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85,571
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$
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69,436
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation and amortization
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142,472
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127,690
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116,614
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Other amortization
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3,879
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|
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3,351
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|
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3,749
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Stock-based compensation
|
10,028
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7,598
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6,029
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Amortization of straight-line rent receivable
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(6,072
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)
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(7,201
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)
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(9,600
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)
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Amortization of straight-line rent liability
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1,497
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|
|
67
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|
|
771
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Gain on sales of real estate assets
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(39,524
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)
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(41,044
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)
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(67,229
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)
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Loss on extinguishment of debt
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44,985
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|
|
—
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27,998
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Impairment of real estate assets
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5,385
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121
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4,325
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Pension termination
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—
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—
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5,260
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Impairment of internally-developed software
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—
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—
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654
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Equity income from unconsolidated joint ventures
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(7
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)
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—
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|
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—
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Provision for bad debts, net
|
159
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|
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(21
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)
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(194
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)
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Changes in operating assets and liabilities:
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Other assets
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(2,156
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)
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(1,332
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)
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(2,932
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)
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Accounts payable and accrued liabilities
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(7,307
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)
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449
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(2,202
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)
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Other liabilities
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3,335
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(23,977
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)
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1,304
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Net cash provided by operating activities
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179,766
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151,272
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|
153,983
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INVESTING ACTIVITIES
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Acquisitions of real estate
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(274,668
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)
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(224,944
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)
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(154,858
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)
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Development of real estate
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(14,911
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)
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(34,719
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)
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(17,354
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)
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Additional long-lived assets
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(80,613
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)
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(71,433
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)
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(48,769
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)
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Investment in unconsolidated joint ventures
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(8,701
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)
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—
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|
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—
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Proceeds from sales of real estate
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119,426
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93,253
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153,281
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Proceeds from mortgages and notes receivable repayments
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19
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19
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1,918
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Net cash used in investing activities
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(259,448
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)
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(237,824
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)
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(65,782
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)
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FINANCING ACTIVITIES
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Net borrowings (repayments) on unsecured credit facility
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82,000
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(99,000
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)
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121,000
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Repayment on term loan
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—
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(50,000
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)
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—
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Borrowings of notes and bonds payable
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297,459
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11,500
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|
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249,793
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Repayments on notes and bonds payable
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(5,829
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)
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(37,910
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)
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(72,724
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)
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Redemption of notes and bonds payable
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(442,774
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)
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—
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|
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(326,830
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)
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Dividends paid
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(142,327
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)
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(131,759
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)
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(120,266
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)
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Net proceeds from issuance of common stock
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248,554
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450,503
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|
66,942
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Common stock redemptions
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(1,686
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)
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(1,756
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)
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(1,367
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)
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Settlement of swaps
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—
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|
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—
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(1,684
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)
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Debt issuance and assumption costs
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(4,007
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)
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(4,621
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)
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(2,482
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)
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Net cash provided by (used in) financing activities
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31,390
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136,957
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(87,618
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)
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Increase (decrease) in cash, cash equivalents and restricted cash
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(48,292
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)
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50,405
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|
|
583
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Cash, cash equivalents and restricted cash at beginning of period
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54,507
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4,102
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|
|
3,519
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Cash, cash equivalents and restricted cash at end of period
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$
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6,215
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|
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$
|
54,507
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$
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4,102
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Supplemental Cash Flow Information:
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Interest paid
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$
|
64,395
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$
|
55,878
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|
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$
|
69,773
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Mortgage notes payable assumed upon acquisition (adjusted to fair value)
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$
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46,374
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$
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13,951
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$
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28,783
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Invoices accrued for construction, tenant improvements and other capitalized costs
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$
|
8,303
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$
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11,734
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$
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10,431
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Capitalized interest
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$
|
871
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$
|
1,258
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$
|
239
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See accompanying notes.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Business Overview
Healthcare Realty Trust Incorporated (the “Company”) is a real estate investment trust ("REIT") that owns, leases, manages, acquires, finances, develops and redevelops income-producing real estate properties associated primarily with the delivery of outpatient healthcare services throughout the United States of America. The Company had gross investments of approximately
$3.8 billion
in
201
real estate properties, construction in progress, land held for development and corporate property as of
December 31, 2017
. The Company’s
201
owned real estate properties are located in
27
states and total approximately
14.6 million
square feet. The Company provided property management services to approximately
11.5 million
square feet nationwide. Square footage and property count disclosures in this Annual Report on Form 10-K are unaudited.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company, its wholly owned subsidiaries, joint ventures, partnerships and consolidated variable interest entities (“VIE”) where the Company controls the operating activities of the VIE.
In accordance with the consolidation accounting standards, the Company must evaluate each contractual relationship it has with its lessees, borrowers, or others to determine whether or not the contractual arrangement creates a variable interest in those entities. If the Company determines that it has a variable interest and the entity is a VIE, then management must determine whether or not the Company is the primary beneficiary of the VIE, resulting in consolidation of the VIE if the Company is the primary beneficiary. A primary beneficiary has the power to direct those activities of the VIE that most significantly impact its economic performance and has the obligation to absorb the losses of, or receive the benefits from, the VIE. The Company had no VIEs as of
December 31, 2017
and
2016
.
The Company's investments in its unconsolidated joint ventures are included in other assets and the related equity income is recognized in other income (expense) on the Company's Consolidated Financial Statements. See Note 7 for additional information.
All significant intercompany accounts, transactions and balances have been eliminated upon consolidation in the Consolidated Financial Statements.
Use of Estimates in the Consolidated Financial Statements
Preparation of the Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results may differ from those estimates.
Segment Reporting
The Company owns, leases, acquires, manages, finances, develops and redevelops outpatient and other healthcare-related properties. The Company is managed as
one
reporting unit, rather than multiple reporting units, for internal reporting purposes and for internal decision-making. Therefore, the Company discloses its operating results in a single reportable segment.
Real Estate Properties
Real estate properties are recorded at cost or at fair value if acquired in a transaction that is a business combination under Accounting Standards Codification Topic 805,
Business Combinations
. Cost or fair value at the time of acquisition is allocated among land, buildings, tenant improvements, lease and other intangibles, and personal property as applicable. The Company’s gross real estate assets, on a financial reporting basis, totaled approximately
$3.8 billion
as of
December 31, 2017
and
$3.6 billion
as of
December 31, 2016
.
During
2017
and
2016
, the Company eliminated against accumulated depreciation approximately
$10.2 million
and
$6.7 million
, respectively, of fully amortized real estate intangibles that were initially recorded as a component of certain real estate acquisitions. Also during
2017
and
2016
, approximately
$2.6 million
and
$0.1 million
of fully depreciated tenant and capital improvements that were no longer in service were eliminated against accumulated depreciation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Depreciation expense for the three years ended December 31, 2017, 2016 and 2015 was
$129.4 million
,
$116.5 million
and
$106.5 million
, respectively. Depreciation and amortization of real estate assets and liabilities in place as of
December 31, 2017
, is provided for on a straight-line basis over the asset’s estimated useful life:
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|
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Land improvements
|
5.0 to 39.0 years
|
Buildings and improvements
|
3.3 to 39.0 years
|
Lease intangibles (including ground lease intangibles)
|
2.1 to 99.0 years
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Personal property
|
2.8 to 20.0 years
|
The Company capitalizes direct costs, including costs such as construction costs and professional services, and indirect costs, including capitalized interest and overhead costs, associated with the development and construction of real estate assets while substantive activities are ongoing to prepare the assets for their intended use. Capitalized interest cost is calculated using the weighted average interest rate of the Company's unsecured debt or the interest rate on project specific debt, if applicable. The Company continues to capitalize interest on the unoccupied portion of the properties in stabilization for up to
one
year after the buildings have been placed into service, at which time the capitalization of interest must cease.
Land Held for Development
Land held for development includes parcels of land owned by the Company, upon which the Company intends to develop and own outpatient healthcare facilities. The Company’s investment in
six
parcels of land held for development located adjacent to certain of the Company's existing medical office buildings in Texas, Iowa and Tennessee totaled approximately
$20.1 million
as of
December 31, 2017
and
2016
.
Asset Impairment
The Company assesses the potential for impairment of identifiable, definite-lived, intangible assets and long-lived assets, including real estate properties, whenever events occur or a change in circumstances indicates that the carrying value might not be fully recoverable. Indicators of impairment may include significant underperformance of an asset relative to historical or expected operating results; significant changes in the Company’s use of assets or the strategy for its overall business; plans to sell an asset before its depreciable life has ended; the expiration of a significant portion of leases in a property; or significant negative economic trends or negative industry trends for the Company or its operators. In addition, the Company reviews for possible impairment, those assets subject to purchase options and those impacted by casualties, such as tornadoes and hurricanes. If management determines that the carrying value of the Company’s assets may not be fully recoverable based on the existence of any of the factors above, or others, management would measure and record an impairment charge based on the estimated fair value of the property or the estimated fair value less costs to sell the property.
Acquisitions of Real Estate Properties with In-Place Leases
Acquisitions of real estate properties with in-place leases are accounted for at relative fair value. When a building with in-place leases is acquired, the cost of the acquisition must be allocated between the tangible real estate assets "as-if-vacant" and the intangible real estate assets related to in-place leases based on their estimated fair values. Where appropriate, the intangible assets recorded could include goodwill or customer relationship assets. The values related to above- or below-market in-place lease intangibles are amortized over the remaining term of the leases upon acquisition to rental income where the Company is the lessor and to property operating expense where the Company is the lessee, and are amortized over the remaining term of the leases upon acquisition.
The Company considers whether any of the in-place lease rental rates are above- or below-market. An asset (if the actual rental rate is above-market) or a liability (if the actual rental rate is below-market) is calculated and recorded in an amount equal to the present value of the future cash flows that represent the difference between the actual lease rate and the average market rate. If an in-place lease is identified as a below-market rental rate, the Company would also evaluate any renewal options associated with that lease to determine if the intangible should include those periods.
The Company also estimates an absorption period, which can vary by property, assuming the building is vacant and must be leased up to the actual level of occupancy when acquired. During that absorption period, the owner would incur direct costs, such as tenant improvements, and would suffer lost rental income. Likewise, the owner would have acquired a measurable asset in that, assuming the building was vacant, certain fixed costs would be avoided because the actual in-place lessees would reimburse a certain portion of fixed costs through expense reimbursements during the absorption period.
All of these intangible assets (above- or below-market lease, tenant improvement costs avoided, leasing costs avoided, rental income lost, and expenses recovered through in-place lessee reimbursements) are estimated and recorded in amounts equal to the present value of estimated future cash flows. The actual purchase price is allocated based on the various asset fair values described above.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The building and tenant improvement components of the purchase price are depreciated over the estimated useful life of the building or the weighted average remaining term of the in-places leases. The at-market, in-place lease intangibles are amortized to amortization expense over the weighted average remaining term of the leases, customer relationship assets are amortized to amortization expense over terms applicable to each acquisition, and any goodwill recorded would be reviewed for impairment at least annually.
The fair values of at-market in-place lease and other intangible assets are amortized and reflected in amortization expense in the Company’s Consolidated Statements of Income. See Note 8 for more details on the Company’s intangible assets.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. In calculating fair value, a company must maximize the use of observable market inputs, minimize the use of unobservable market inputs and disclose in the form of an outlined hierarchy the details of such fair value measurements.
A hierarchy of valuation techniques is defined to determine whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available. These inputs have created the following fair value hierarchy:
|
|
•
|
Level 1
– quoted prices for identical instruments in active markets;
|
|
|
•
|
Level 2
– quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
|
|
|
•
|
Level 3
– fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
|
Executed purchase and sale agreements, that are binding agreements, are categorized as level
one
inputs. Brokerage estimates, letters of intent, or unexecuted purchase and sale agreements are considered to be level
three
as they are nonbinding in nature.
During
2017
, in connection with the sale of a medical office building, the Company recorded an impairment charge in continuing operations of approximately
$5.1 million
based on the contractual sales price, a level
one
input. The Company used level
one
inputs to record an impairment charge in continuing operations of approximately
$0.3 million
related to another property sold during 2017, reducing the Company's carrying value to the estimated fair value of the property less costs to sell prior to sale.
Fair Value of Derivative Financial Instruments
Derivative financial instruments are recorded at fair value on the Company's Consolidated Balance Sheets as other assets or other liabilities. The valuation of derivative instruments requires the Company to make estimates and judgments that affect the fair value of the instruments. Fair values of derivatives are estimated by pricing models that consider the forward yield curves and discount rates. The fair value of the Company's forward starting interest rate swap contracts are estimated by pricing models that consider foreign trade rates and discount rates. Such amounts and the recognition of such amounts are subject to significant estimates that may change in the future. For derivatives designated in qualifying cash flow hedging relationships, the change in fair value of the effective portion of the derivatives is recognized in accumulated other comprehensive income (loss). Gains and losses are reclassified from accumulated other comprehensive income (loss) into earnings once the underlying hedged transaction is recognized in earnings. As of
December 31, 2017
and 2016, the Company had
$1.3 million
and
$1.4 million
, respectively recorded in accumulated other comprehensive loss related to forward starting interest rate swaps entered into and settled during 2015 and a hedge of the Company's variable rate debt. See Note 10 for additional information.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents includes short-term investments with original maturities of three months or less when purchased. Restricted cash includes cash held in escrow in connection with proceeds from the sales of certain real estate properties. The carrying amount approximates fair value due to the short term maturity of these investments. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Company's Consolidated Balance Sheets with the same amounts shown on the Company's Consolidated Statements of Cash Flows:
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|
|
|
|
|
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|
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2017
|
|
2016
|
|
Cash and cash equivalents
|
|
$
|
6,215
|
|
|
$
|
5,409
|
|
|
Restricted cash
|
|
—
|
|
|
49,098
|
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
6,215
|
|
|
$
|
54,507
|
|
|
Allowance for Doubtful Accounts and Credit Losses
Accounts Receivable
Management monitors the aging and collectibility of its accounts receivable balances on an ongoing basis. Whenever deterioration in the timeliness of payment from a tenant or sponsoring health system is noted, management investigates and determines the reason or reasons for the delay. Considering all information gathered, management’s judgment is exercised in determining whether a receivable is potentially uncollectible and, if so, how much or what percentage may be uncollectible. Among the factors management considers in determining collectibility are: the type of contractual arrangement under which the receivable was recorded (e.g., a triple net lease, a gross lease, a property operating agreement, or some other type of agreement); the tenant’s reason for slow payment; industry influences under which the tenant operates; evidence of willingness and ability of the tenant to pay the receivable; credit-worthiness of the tenant; collateral, security deposit, letters of credit or other monies held as security; tenant’s historical payment pattern; other contractual agreements between the tenant and the Company; relationship between the tenant and the Company; the state in which the tenant operates; and the existence of a guarantor and the willingness and ability of the guarantor to pay the receivable. Considering these factors and others, management concludes whether all or some of the aged receivable balance is likely uncollectible. Upon determining that some portion of the receivable is likely uncollectible, the Company records a provision for bad debts for the amount it expects will be uncollectible. When efforts to collect a receivable are exhausted, the receivable amount is charged off against the allowance. The Company does not hold any accounts receivable for sale.
Mortgage Notes
The Company had no mortgage notes receivable outstanding as of
December 31, 2017
and
2016
and no allowances were recorded on mortgage notes receivables during
2017
or
2016
. The Company evaluates collectibility of any mortgage notes and records allowances on the notes as necessary. A loan is impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan as scheduled, including both contractual interest and principal payments. This assessment also includes an evaluation of the loan collateral. If a mortgage loan becomes past due, the Company will review the specific circumstances and may discontinue the accrual of interest on the loan. The loan is not returned to accrual status until the debtor has demonstrated the ability to continue debt service in accordance with the contractual terms. Loans placed on non-accrual status will be accounted for either on a cash basis, in which income is recognized only upon receipt of cash, or on a cost-recovery basis, in which all cash receipts reduce the carrying value of the loan, based on the Company’s expectation of future collectibility.
Goodwill and Other Intangible Assets
Goodwill and intangible assets with indefinite lives are not amortized, but are tested at least annually for impairment. Intangible assets with finite lives are amortized over their respective lives to their estimated residual values and are reviewed for impairment only when impairment indicators are present.
Identifiable intangible assets of the Company are comprised of enterprise goodwill, in-place lease intangible assets, customer relationship intangible assets, and deferred financing costs. In-place lease and customer relationship intangible assets are amortized on a straight-line basis over the applicable lives of the assets. Deferred financing costs are amortized over the term of the related credit facility or other debt instrument under the straight-line method, which approximates amortization under the effective interest method. Goodwill is not amortized but is evaluated annually as of December 31 for impairment. Both the
2017
and
2016
impairment evaluations indicated that
no
impairment had occurred with respect to the
$3.5 million
goodwill asset. See Note 8 for more detail on the Company’s intangible assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Contingent Liabilities
From time to time, the Company may be subject to loss contingencies arising from legal proceedings and similar matters. Additionally, while the Company maintains comprehensive liability and property insurance with respect to each of its properties, the Company may be exposed to unforeseen losses related to uninsured or underinsured damages.
The Company continually monitors any matters that may present a contingent liability, and, on a quarterly basis, management reviews the Company’s reserves and accruals in relation to each of them, adjusting provisions as necessary in view of changes in available information. Liabilities for contingencies are first recorded when a loss is determined to be both probable and can be reasonably estimated. Changes in estimates regarding the exposure to a contingent loss are reflected as adjustments to the related liability in the periods when they occur.
Because of uncertainties inherent in the estimation of contingent liabilities, it is possible that the Company’s provision for contingent losses could change materially in the near term. To the extent that any significant losses, in addition to amounts recognized, are at least reasonably possible, such amounts will be disclosed in the notes to the Consolidated Financial Statements.
Stock-Based Compensation
The Company has various employee and director stock-based awards outstanding. These awards include non-vested common stock and options to purchase common stock granted to employees pursuant to the 2015 Stock Incentive Plan and its predecessor plans (the “2015 Incentive Plan”) and the 2000 Employee Stock Purchase Plan (the “Employee Stock Purchase Plan”). The Company recognizes share-based payments to employees and directors in the Consolidated Statements of Income on a straight-line basis over the requisite service period based on the fair value of the award on the measurement date.
The Employee Stock Purchase Plan features a “look-back” provision which enables the employee to purchase a fixed number of common shares at the lesser of
85%
of the market price on the date of grant or
85%
of the market price on the date of exercise, with optional purchase dates occurring once each quarter for
27 months
. The Company accounts for awards to its employees under the Employee Stock Purchase Plan based on fair value, using the Black-Scholes model, and generally recognizes expense over the award’s vesting period, net of estimated forfeitures. Since the options granted under the Employee Stock Purchase Plan immediately vest, the Company records compensation expense for those options when they are granted in the first quarter of each year and then may record additional compensation expense in subsequent quarters as warranted. In each of the years ended
December 31, 2017
,
2016
and
2015
, the Company recognized in general and administrative expenses approximately
$0.2 million
of compensation expense related to the annual grant of options to its employees to purchase shares under the Employee Stock Purchase Plan.
See Note 13 for details on the Company’s stock-based awards.
Accumulated Other Comprehensive Income (Loss)
Certain items must be included in comprehensive income, including items such as foreign currency translation adjustments, minimum pension liability adjustments, derivative instruments and unrealized gains or losses on available-for-sale securities. The Company’s accumulated other comprehensive income (loss) as of December 31, 2017 consists of the loss for changes in the fair value of active derivatives designated as cash flow hedges and the loss on the unamortized settlement of
four
forward starting swaps. As of December 31, 2016, the Company's accumulated other comprehensive income (loss) consisted only of the loss on the unamortized settlement of
four
forward starting swaps. See Note 10 for more details on the Company's derivative financial instruments.
Revenue Recognition
The Company recognizes revenue when it is realized or realizable and earned. There are four criteria that must all be met before a Company may recognize revenue, including that persuasive evidence that an arrangement exists, delivery has occurred or services have been rendered (i.e., the tenant has taken possession of and controls the physical use of the leased asset), the price has been fixed or is determinable, and collectibility is reasonably assured. Income received but not yet earned is deferred until such time it is earned. Deferred revenue, included in other liabilities on the Consolidated Balance Sheets, was
$36.0 million
and
$32.4 million
, respectively, as of
December 31, 2017
and
2016
which includes deferred tenant improvement reimbursements of
$20.1 million
and
$20.6 million
, respectively, which will be recognized as revenue over the life of each respective lease.
The Company derives most of its revenues from its real estate property portfolio. The Company’s rental and mortgage interest income is recognized based on contractual arrangements with its tenants, sponsoring health systems or borrowers. These contractual arrangements fall into three categories: leases, mortgage notes receivable, and property operating agreements as described in the following paragraphs. The Company may accrue late fees based on the contractual terms of a lease or note. Such fees, if accrued, are included in rental income or mortgage interest income on the Company’s Consolidated Statements of Income, based on the type of contractual agreement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Rental Income
Rental income related to non-cancelable operating leases is recognized as earned over the life of the lease agreements on a straight-line basis. The Company's lease agreements generally include provisions for stated annual increases or increases based on a Consumer Price Index ("CPI"). Rental income from properties under multi-tenant office lease arrangements and rental income from properties with single-tenant lease arrangements are included in rental income on the Company's Consolidated Statements of Income. The components of rental income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Dollars in thousands)
|
2017
|
|
|
2016
|
|
|
2015
|
|
Property operating income
|
$
|
363,907
|
|
|
$
|
336,409
|
|
|
$
|
306,550
|
|
Single-tenant net lease
|
52,873
|
|
|
63,871
|
|
|
67,238
|
|
Straight-line rent
|
6,072
|
|
|
7,201
|
|
|
9,545
|
|
Rental income
|
$
|
422,852
|
|
|
$
|
407,481
|
|
|
$
|
383,333
|
|
Operating expense recoveries, included in property operating income, were approximately
$73.4 million
,
$66.0 million
and
$58.9 million
, respectively, for the years ended
December 31, 2017
,
2016
and
2015
.
Mortgage Interest Income
Interest income on the Company’s mortgage notes receivable is recognized based on the interest rates, maturity dates and amortization periods in accordance with each note agreement. The Company has no outstanding mortgage notes receivable as of
December 31, 2017
, 2016 and 2015. The Company amortizes any fees paid related to its mortgage notes receivable to mortgage interest income over the term of the loan on a straight-line basis which approximates amortization under the effective interest method.
Other Operating Income
Other operating income on the Company’s Consolidated Statements of Income was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Dollars in thousands)
|
2017
|
|
|
2016
|
|
|
2015
|
|
Property lease guaranty revenue
|
$
|
726
|
|
|
$
|
3,058
|
|
|
$
|
3,890
|
|
Interest income
|
361
|
|
|
473
|
|
|
579
|
|
Management fee income
|
276
|
|
|
369
|
|
|
370
|
|
Other
|
284
|
|
|
249
|
|
|
208
|
|
|
$
|
1,647
|
|
|
$
|
4,149
|
|
|
$
|
5,047
|
|
One
,
two
and
five
of the Company’s owned real estate properties as of
December 31, 2017
, 2016 and 2015, respectively, were covered under property operating agreements between the Company and a sponsoring health system, which contractually obligate the sponsoring health system to provide to the Company a minimum return on the Company’s investment in the property in exchange for the right to be involved in the operating decisions of the property, including tenancy. If the minimum return is not achieved through normal operations of the property, the Company calculates and accrues to property lease guaranty revenue, each quarter, any shortfalls due from the sponsoring health systems under the terms of the property operating agreement.
Interest income generally relates to interest on tenant improvement reimbursements as defined in each note or lease agreement.
Management fees for property management services provided to third parties are generally calculated, accrued and billed monthly based on a percentage of cash collections of tenant receivables for the month or a stated amount per square foot. Internal management fee income, where the Company manages its owned properties, is eliminated in consolidation.
Federal Income Taxes
No provision has been made for federal income taxes. The Company intends at all times to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code. The Company must distribute at least
90%
per annum of its real estate investment trust taxable income to its stockholders and meet other requirements to continue to qualify as a real estate investment trust. See Note 16 for further discussion.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company classifies interest and penalties related to uncertain tax positions, if any, in the Consolidated Financial Statements as a component of general and administrative expenses. No such amounts were recognized during the three years ended December 31, 2017.
Federal tax returns for the years 2014,
2015
,
2016
and
2017
are currently subject to examination by taxing authorities.
State Income Taxes
The Company must pay certain state income taxes and the provisions for such taxes are generally included in general and administrative expense on the Company’s Consolidated Statements of Income. See Note 16 for further discussion.
Sales and Use Taxes
The Company must pay sales and use taxes to certain state tax authorities based on rents collected from tenants in properties located in those states. The Company is generally reimbursed for these taxes by the tenant. The Company accounts for the payments to the taxing authority and subsequent reimbursement from the tenant on a net basis in revenues in the Company’s Consolidated Statements of Income.
Discontinued Operations
The Company sells properties from time to time due to a variety of factors, including among other things, market conditions or the exercise of purchase options by tenants. The Company does not expect these dispositions to meet the amended definition of a discontinued operation as defined in Accounting Standards Update ("ASU") No. 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." The Company adopted ASU No. 2014-08 on a prospective basis beginning January 1, 2015 which excluded properties previously in discontinued operations prior to adoption. However, if a sale were to meet the amended definition representing a strategic shift that has or will have a major effect on the Company's operations and financial results, the operating results of the properties that have been sold or are held for sale will be reported as discontinued operations in the Company’s Consolidated Statements of Income for all periods presented.
Assets Held for Sale
Long-lived assets held for sale are reported at the lower of their carrying amount or their fair value less cost to sell estimate. Further, depreciation of these assets ceases at the time the assets are classified as held for sale. Losses resulting from the sale of such properties are characterized as impairment losses in the Consolidated Statements of Income. See Note 5 for more detail on discontinued operations and assets held for sale.
Earnings per Share
The Company uses the two-class method of computing net earnings per common share. Earnings per common share is calculated by considering share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents as participating securities. Undistributed earnings (excess net income over dividend payments) are allocated on a prorata basis to common shareholders and restricted shareholders. Undistributed losses (dividends in excess of net income) do not get allocated to restricted stockholders as they do not have the contractual obligation to share in losses. The amount of undistributed losses that applies to the restricted stockholders is allocated to the common stockholder.
Basic earnings per common share is calculated using weighted average shares outstanding less issued and outstanding non-vested shares of common stock. Diluted earnings per common share is calculated using weighted average shares outstanding plus the dilutive effect of the outstanding stock options from the Employee Stock Purchase Plan using the treasury stock method and the average stock price during the period. See Note 14 for the calculations of earnings per share.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Reclassifications
Condensed Consolidated Statements of Income
Certain reclassifications have been made on the Company's Condensed Consolidated Statements of Income. The Company reclassified acquisition and pursuit costs from the general and administrative line item to a separate line item. The acquisition and pursuit costs line item includes direct third party and travel costs related to the Company's pursuit of acquisitions and developments. In addition, the Company combined the line items labeled depreciation and amortization into one line item. These reclassifications are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
(in thousands)
|
|
As Previously Reported
|
|
As Reclassified
|
|
As Previously Reported
|
|
As Reclassified
|
General and administrative
|
|
$
|
35,805
|
|
|
$
|
31,309
|
|
|
$
|
26,925
|
|
|
$
|
24,716
|
|
Acquisition and pursuit costs
|
|
—
|
|
|
4,496
|
|
|
—
|
|
|
2,209
|
|
Total
|
|
$
|
35,805
|
|
|
$
|
35,805
|
|
|
$
|
26,925
|
|
|
$
|
26,925
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$
|
116,483
|
|
|
$
|
—
|
|
|
$
|
106,530
|
|
|
$
|
—
|
|
Amortization
|
|
11,207
|
|
|
—
|
|
|
10,084
|
|
|
—
|
|
Depreciation and amortization
|
|
—
|
|
|
127,690
|
|
|
—
|
|
|
116,614
|
|
Total
|
|
$
|
127,690
|
|
|
$
|
127,690
|
|
|
$
|
116,614
|
|
|
$
|
116,614
|
|
New Accounting Pronouncements
Accounting Standards Update No. 2014-09 and No. 2015-14
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, "Revenue from Contracts with Customers," a comprehensive new revenue recognition standard that supersedes most existing revenue recognition guidance, including sales of real estate. This standard's core principle is that a company will recognize revenue when it transfers goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods and services. However, leasing contracts, representing the major source of the Company's revenues, are not within the scope of the new standard and will continue to be accounted for under other standards.
In August 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606); Deferral of the Effective Date." This standard is effective for the Company for annual and interim periods beginning after December 15, 2017.
The Company adopted this standard by using the full retrospective adoption method beginning on January 1, 2018. The Company's revenue-producing contracts are primarily leases that are not within the scope of this standard. As a result, the adoption of this standard did not have a material impact on the timing and measurement of the Company's leasing revenues. The Company has identified that parking income, rental lease guaranty income and management fee income will be within the scope of Topic 606. However, these items were determined to have the same pattern of revenue recognition that the Company had historically recognized. The Company reclassified these amounts along with all other items that are accounted for within the scope of Topic 606 into the Other operating line item on the Company's Consolidated Statements of Income. This line item historically contained the revenue associated with rental lease guaranty income, management fee income and other non-lease revenue. The Company reclassified parking income from rental income to other operating income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table represents the impact of the adoption of this standard on the Company's Consolidated Statements of Income for the years ended December 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
(in thousands)
|
As Reported
|
|
As Reclassified
|
|
As Previously Reported
|
|
As Reclassified
|
REVENUES
|
|
|
|
|
|
|
|
Rental income
|
$
|
422,852
|
|
|
$
|
416,727
|
|
|
$
|
407,481
|
|
|
$
|
401,989
|
|
Other operating
|
1,647
|
|
|
8,011
|
|
|
4,149
|
|
|
9,966
|
|
|
$
|
424,499
|
|
|
$
|
424,738
|
|
|
$
|
411,630
|
|
|
$
|
411,955
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
Interest and other income, net
|
$
|
896
|
|
|
$
|
658
|
|
|
$
|
375
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS
|
$
|
23,096
|
|
|
$
|
23,096
|
|
|
$
|
85,756
|
|
|
$
|
85,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting Standards Update No. 2016-02
In February 2016, the FASB issued ASU No. 2016-02, "Leases." For lessees, the new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The Company expects that all of the leases where the Company is the lessee will be recorded on the Company's balance sheet. See Note 15 for a discussion of leases where the Company is the lessee. For lessors, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as financing. If the lessor doesn't convey risks and rewards or control, then the lease would be classified as an operating lease. The Company has historically only entered into operating leases.
The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years with early adoption permitted. A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is evaluating the impact from the adoption of this new standard on the Consolidated Financial Statements and related notes.
Accounting Standards Update No. 2016-13
In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." This update is intended to improve financial reporting by requiring timelier recognition of credit losses on loans and other financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other such commitments. This update requires that financial statement assets measured at an amortized cost and certain other financial instruments be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. This standard is effective for annual and interim periods beginning after December 15, 2019 with early adoption permitted. The Company is in the initial stages of evaluating the impact from the adoption of this new standard on the Consolidated Financial Statements and related notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Accounting Standards Update No. 2016-15
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments." This update clarifies whether the following items should be classified as operating, investing or financing in the statement of cash flows: (i) debt prepayments and extinguishment costs, (ii) settlement of zero-coupon debt, (iii) settlement of contingent consideration, (iv) insurance proceeds, (v) settlement of corporate-owned life insurance and bank-owned life insurance policies, (vi) distributions from equity method investees, (vii) beneficial interest in securitization transactions and (viii) receipts and payments with aspects of more than one class of cash flows.
This standard is effective for the Company for annual and interim periods beginning on January 1, 2018 with early adoption permitted on a retrospective transition method to each period presented. The Company adopted this standard effective January 1, 2017. In connection with the adoption of this update, the Company elected to use the cumulative earnings approach to classify distributions when received related to the Company's equity method investments. There was not a material impact on the Company's Consolidated Financial Statements and related notes resulting from the adoption of this standard. However, the Company made the following reclassification of accrued interest related to the early extinguishment of debt on its Statements of Cash Flows for the year ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
(in thousands)
|
|
As Previously Reported
|
|
As Reclassified
|
Cash flows used in financing activities
|
|
$
|
(94,010
|
)
|
|
$
|
(87,618
|
)
|
|
|
|
|
|
Cash flows provided by operating activities
|
|
$
|
160,375
|
|
|
$
|
153,983
|
|
Accounting Standards Update No. 2017-01
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations: Clarifying the Definition of a Business." This update modifies the requirements to meet the definition of a business under Topic 805, "Business Combinations." The amendments provide a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. The Company believes that this amendment will result in most of its real estate acquisitions being accounted for as asset acquisitions rather than business combinations. This standard is effective for the Company for annual and interim periods beginning after December 15, 2017 with early adoption permitted. The Company adopted this standard effective January 1, 2017 and has accounted for acquisitions that occurred during the year as asset acquisitions. The impact to the Consolidated Financial Statements and related notes as a result of the adoption of this standard is primarily related to the difference in the accounting of acquisition costs. When accounting for these costs as a part of an asset acquisition, the Company will be permitted to capitalize the costs. The adoption of this standard did not have a material impact on the Consolidated Financial Statements and related notes.
Accounting Standards Update No. 2017-04
In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment." This update eliminates Step 2 of the goodwill impairment test. As such, an entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the reporting unit's carrying amount exceeds its fair value. This standard is effective for the Company for annual and interim periods beginning after December 15, 2019. The Company does not expect a material impact on the Consolidated Financial Statements and related notes from the adoption of this standard.
Accounting Standards Update No. 2017-05
In February 2017, the FASB issued ASU 2017-05, "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets." This update defines an in-substance nonfinancial asset, unifies guidance related to partial sales of nonfinancial assets, eliminates rules specifically addressing the sales of real estate, removes exception to the financial asset derecognition model and clarifies the accounting for contributions of nonfinancial assets to joint ventures. This standard is effective for the Company for annual and interim periods beginning after December 15, 2017 with early adoption permitted. The Company adopted this standard as of January 1, 2018 on the full retrospective adoption method. However, there was no impact to the Company's Consolidated Financial Statements from the adoption of this standard.
Accounting Standards Update No. 2017-09
In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation - Scope of Modification Accounting." This update provides guidance about which changes to the terms and conditions of share-based awards require an entity to apply modification accounting in Topic 718. This standard is effective for the Company for the annual and interim periods beginning after December 15, 2017 with early adoption permitted. The Company adopted this standard on January 1, 2018. The Company does not expect a material impact to the Consolidated Financial Statements from the adoption of this standard.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Accounting Standards Update No. 2017-12
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities." The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. The transition guidance allows for early adoption of the new standard using a modified retrospective transition method in any interim period after issuance of the update, or alternatively requires adoption for fiscal years beginning after December 15, 2018. The modified retrospective transition method will require the Company to recognize the cumulative effect of initially applying this standard as an adjustment to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the update. The Company adopted this standard in the fourth quarter of 2017. The Company entered into two interest rate swaps in December 2017 in which the Company elected hedge accounting in compliance with this standard. The Company had no active hedging relationships upon the adoption of this standard and therefore, the adoption of the standard did not have an impact on the Company's Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Property Investments
The Company invests in healthcare-related properties located throughout the United States. The Company provides management, leasing, development and redevelopment services, and capital for the construction of new facilities as well as for the acquisition of existing properties. The Company had gross investments of approximately
$3.8 billion
in
201
real estate properties, land held for development and corporate property as of
December 31, 2017
. The following table summarizes the Company’s investments at December 31, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Number of Facilities
|
|
|
Land
|
|
|
Buildings, Improvements,and Lease Intangibles
|
|
|
Personal Property
|
|
|
Total
|
|
|
Accumulated Depreciation
|
|
Medical office/outpatient:
|
|
|
|
|
|
|
|
|
|
|
|
Seattle, Washington
|
17
|
|
|
$
|
24,560
|
|
|
$
|
403,614
|
|
|
$
|
378
|
|
|
$
|
428,552
|
|
|
$
|
(52,457
|
)
|
Dallas, Texas
|
24
|
|
|
12,472
|
|
|
365,657
|
|
|
416
|
|
|
378,545
|
|
|
(128,557
|
)
|
Atlanta, Georgia
|
8
|
|
|
1,015
|
|
|
187,042
|
|
|
—
|
|
|
188,057
|
|
|
(1,203
|
)
|
Los Angeles, California
|
11
|
|
|
27,709
|
|
|
141,681
|
|
|
277
|
|
|
169,667
|
|
|
(71,808
|
)
|
Charlotte, North Carolina
|
16
|
|
|
4,200
|
|
|
163,603
|
|
|
95
|
|
|
167,898
|
|
|
(56,355
|
)
|
Nashville, Tennessee
|
5
|
|
|
3,143
|
|
|
149,859
|
|
|
278
|
|
|
153,280
|
|
|
(43,000
|
)
|
Richmond, Virginia
|
7
|
|
|
—
|
|
|
146,176
|
|
|
98
|
|
|
146,274
|
|
|
(32,299
|
)
|
Honolulu, Hawaii
|
3
|
|
|
8,327
|
|
|
132,847
|
|
|
159
|
|
|
141,333
|
|
|
(30,066
|
)
|
Denver, Colorado
|
6
|
|
|
4,086
|
|
|
122,689
|
|
|
271
|
|
|
127,046
|
|
|
(18,736
|
)
|
San Francisco, California
|
3
|
|
|
14,054
|
|
|
103,938
|
|
|
43
|
|
|
118,035
|
|
|
(12,223
|
)
|
Oklahoma City, Oklahoma
|
2
|
|
|
7,673
|
|
|
101,432
|
|
|
6
|
|
|
109,111
|
|
|
(10,890
|
)
|
Washington, D.C.
|
4
|
|
|
—
|
|
|
100,570
|
|
|
—
|
|
|
100,570
|
|
|
(15,826
|
)
|
Austin, Texas
|
4
|
|
|
12,756
|
|
|
85,961
|
|
|
105
|
|
|
98,822
|
|
|
(17,498
|
)
|
San Antonio, Texas
|
7
|
|
|
6,647
|
|
|
88,129
|
|
|
370
|
|
|
95,146
|
|
|
(34,514
|
)
|
Memphis, Tennessee
|
7
|
|
|
5,241
|
|
|
88,517
|
|
|
160
|
|
|
93,918
|
|
|
(31,675
|
)
|
Des Moines, Iowa
|
6
|
|
|
12,665
|
|
|
79,214
|
|
|
94
|
|
|
91,973
|
|
|
(18,263
|
)
|
Chicago, Illinois
|
3
|
|
|
5,859
|
|
|
79,295
|
|
|
200
|
|
|
85,354
|
|
|
(15,476
|
)
|
Indianapolis, Indiana
|
3
|
|
|
3,299
|
|
|
71,641
|
|
|
—
|
|
|
74,940
|
|
|
(18,742
|
)
|
Other (22 markets)
|
52
|
|
|
38,598
|
|
|
678,196
|
|
|
1,163
|
|
|
717,957
|
|
|
(206,844
|
)
|
|
188
|
|
|
192,304
|
|
|
3,290,061
|
|
|
4,113
|
|
|
3,486,478
|
|
|
(816,432
|
)
|
Inpatient:
|
|
|
|
|
|
|
|
|
|
|
|
Springfield, Missouri
|
1
|
|
|
1,989
|
|
|
109,304
|
|
|
—
|
|
|
111,293
|
|
|
(12,046
|
)
|
Dallas, Texas
|
1
|
|
|
4,442
|
|
|
92,990
|
|
|
—
|
|
|
97,432
|
|
|
(19,538
|
)
|
Erie, Pennsylvania
|
1
|
|
|
—
|
|
|
21,355
|
|
|
—
|
|
|
21,355
|
|
|
(15,152
|
)
|
Los Angeles, California
|
1
|
|
|
—
|
|
|
12,688
|
|
|
—
|
|
|
12,688
|
|
|
(7,606
|
)
|
Denver, Colorado
|
1
|
|
|
623
|
|
|
10,788
|
|
|
—
|
|
|
11,411
|
|
|
(1,781
|
)
|
|
5
|
|
|
7,054
|
|
|
247,125
|
|
|
—
|
|
|
254,179
|
|
|
(56,123
|
)
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
Des Moines, Iowa
|
1
|
|
|
—
|
|
|
40,354
|
|
|
5
|
|
|
40,359
|
|
|
(7,704
|
)
|
Johnson City, Tennessee
|
1
|
|
|
253
|
|
|
7,319
|
|
|
408
|
|
|
7,980
|
|
|
(2,798
|
)
|
Austin, Texas
|
1
|
|
|
1,480
|
|
|
3,872
|
|
|
2
|
|
|
5,354
|
|
|
(164
|
)
|
Fenton, Michigan
|
1
|
|
|
40
|
|
|
3,468
|
|
|
32
|
|
|
3,540
|
|
|
(2,738
|
)
|
Ovid, Michigan
|
1
|
|
|
62
|
|
|
3,188
|
|
|
49
|
|
|
3,299
|
|
|
(2,096
|
)
|
Fremont, Michigan
|
1
|
|
|
7
|
|
|
3,242
|
|
|
35
|
|
|
3,284
|
|
|
(2,565
|
)
|
St. Louis, Michigan
|
1
|
|
|
31
|
|
|
1,735
|
|
|
33
|
|
|
1,799
|
|
|
(1,341
|
)
|
Detroit, Michigan
|
1
|
|
|
52
|
|
|
1,096
|
|
|
34
|
|
|
1,182
|
|
|
(829
|
)
|
|
8
|
|
|
1,925
|
|
|
64,274
|
|
|
598
|
|
|
66,797
|
|
|
(20,235
|
)
|
Land Held for Development
|
—
|
|
|
20,123
|
|
|
—
|
|
|
—
|
|
|
20,123
|
|
|
(239
|
)
|
Construction in Progress
|
—
|
|
|
—
|
|
|
5,458
|
|
|
—
|
|
|
5,458
|
|
|
—
|
|
Corporate Property
|
—
|
|
|
—
|
|
|
—
|
|
|
5,603
|
|
|
5,603
|
|
|
(4,401
|
)
|
|
—
|
|
|
20,123
|
|
|
5,458
|
|
|
5,603
|
|
|
31,184
|
|
|
(4,640
|
)
|
Total real estate investments
|
201
|
|
|
$
|
221,406
|
|
|
$
|
3,606,918
|
|
|
$
|
10,314
|
|
|
$
|
3,838,638
|
|
|
$
|
(897,430
|
)
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
3. Real Estate Leases
Real Estate Leases
The Company’s properties are generally leased pursuant to non-cancelable, fixed-term operating leases with expiration dates through
2036
. Some leases and financial arrangements provide for fixed rent renewal terms in addition to market rent renewal terms. Some leases provide the lessee, during the term of the lease and for a short period thereafter, with an option or a right of first refusal to purchase the leased property. The Company’s portfolio of single-tenant net leases generally requires the lessee to pay minimum rent and all taxes (including property tax), insurance, maintenance and other operating costs associated with the leased property.
Future minimum lease payments under the non-cancelable operating leases and guaranteed amounts payable to the Company under property operating agreements as of
December 31, 2017
are as follows (in thousands):
|
|
|
|
|
2018
|
$
|
330,526
|
|
2019
|
282,910
|
|
2020
|
236,454
|
|
2021
|
196,346
|
|
2022
|
168,183
|
|
2023 and thereafter
|
544,677
|
|
|
$
|
1,759,096
|
|
Revenue Concentrations
The Company’s real estate portfolio is leased to a diverse tenant base. The Company's largest revenue concentration is with Baylor Scott & White Health and its affiliates which accounted for
9.7%
,
9.8%
and
9.8%
of the Company's consolidated revenues for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Purchase Option Provisions
Certain of the Company’s leases include purchase option provisions. The provisions vary by agreement but generally allow the lessee to purchase the property covered by the agreement at
fair market value or an amount equal to the Company’s gross investment
. The Company expects that the purchase price from its purchase options will be greater than its net investment in the properties at the time of potential exercise by the lessee. The Company had approximately
$95.2 million
in
four
real estate properties as of
December 31, 2017
that were subject to purchase options that were exercisable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. Acquisitions, Dispositions and Mortgage Repayments
2017 Real Estate Acquisitions
The following table details the Company's acquisitions for the year ended
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Type
(1)
|
|
Date
Acquired
|
|
Purchase Price
|
|
|
Mortgage
Notes Payable Assumed
(2)
|
|
|
Cash
Consideration
(3)
|
|
|
Real
Estate
|
|
|
Other
(4)
|
|
|
Square
Footage
(Unaudited)
|
|
Real estate acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
St. Paul, Minnesota
|
MOB
|
|
3/6/17
|
|
$
|
13.5
|
|
|
$
|
—
|
|
|
$
|
13.5
|
|
|
$
|
13.3
|
|
|
$
|
0.2
|
|
|
34,608
|
|
San Francisco, California
|
MOB
|
|
6/12/17
|
|
26.8
|
|
|
—
|
|
|
26.8
|
|
|
26.8
|
|
|
—
|
|
|
75,649
|
|
Washington, D.C.
|
MOB
|
|
6/13/17
|
|
24.0
|
|
|
(12.1
|
)
|
|
12.5
|
|
|
24.8
|
|
|
(0.2
|
)
|
|
62,379
|
|
Los Angeles, California
|
MOB
|
|
7/31/17
|
|
16.3
|
|
|
—
|
|
|
16.7
|
|
|
16.9
|
|
|
(0.2
|
)
|
|
42,780
|
|
Atlanta, Georgia
|
MOB
|
|
11/1/17
|
|
25.5
|
|
|
—
|
|
|
25.5
|
|
|
26.3
|
|
|
(0.8
|
)
|
|
76,944
|
|
Atlanta, Georgia
|
MOB
|
|
11/1/17
|
|
30.3
|
|
|
—
|
|
|
30.7
|
|
|
30.7
|
|
|
—
|
|
|
74,024
|
|
Atlanta, Georgia
(5)
|
MOB
|
|
11/1/17
|
|
49.7
|
|
|
—
|
|
|
50.9
|
|
|
47.5
|
|
|
3.4
|
|
|
118,180
|
|
Atlanta, Georgia
|
MOB
|
|
11/1/17
|
|
6.7
|
|
|
—
|
|
|
6.7
|
|
|
6.7
|
|
|
—
|
|
|
19,732
|
|
Seattle, Washington
|
MOB
|
|
11/1/17
|
|
12.7
|
|
|
—
|
|
|
12.6
|
|
|
12.8
|
|
|
(0.2
|
)
|
|
26,345
|
|
Atlanta, Georgia
(5)
|
MOB
|
|
12/13/17
|
|
25.8
|
|
|
(10.5
|
)
|
|
15.3
|
|
|
22.0
|
|
|
3.8
|
|
|
59,427
|
|
Atlanta, Georgia
|
MOB
|
|
12/13/17
|
|
15.4
|
|
|
(4.7
|
)
|
|
10.8
|
|
|
15.7
|
|
|
(0.2
|
)
|
|
40,171
|
|
Atlanta, Georgia
(5)
|
MOB
|
|
12/18/17
|
|
26.3
|
|
|
(11.8
|
)
|
|
14.5
|
|
|
24.6
|
|
|
1.7
|
|
|
66,984
|
|
Atlanta, Georgia
|
MOB
|
|
12/18/17
|
|
14.2
|
|
|
(6.7
|
)
|
|
7.6
|
|
|
14.5
|
|
|
(0.2
|
)
|
|
40,324
|
|
Chicago, Illinois
|
MOB
|
|
12/18/17
|
|
28.7
|
|
|
—
|
|
|
27.7
|
|
|
28.5
|
|
|
(0.8
|
)
|
|
99,526
|
|
Seattle, Washington
|
MOB
|
|
12/18/17
|
|
8.8
|
|
|
—
|
|
|
8.8
|
|
|
9.0
|
|
|
(0.2
|
)
|
|
32,828
|
|
Austin, Texas
(6)
|
MOB
|
|
12/21/17
|
|
2.5
|
|
|
—
|
|
|
2.5
|
|
|
2.5
|
|
|
—
|
|
|
7,972
|
|
|
|
|
|
|
$
|
327.2
|
|
|
$
|
(45.8
|
)
|
|
$
|
283.1
|
|
|
$
|
322.6
|
|
|
$
|
6.3
|
|
|
877,873
|
|
______
|
|
(1)
|
MOB = medical office building
|
|
|
(2)
|
The mortgage notes payable assumed in the acquisitions do not reflect the fair value adjustments totaling
$0.6 million
in aggregate recorded by the Company upon acquisition (included in Other).
|
|
|
(3)
|
Cash consideration excludes prorations of revenue and expense due to/from seller at the time of the acquisition.
|
|
|
(4)
|
Includes other assets acquired, liabilities assumed, intangibles recognized at acquisition and fair value adjustments on debt assumed.
|
|
|
(5)
|
The "Other" column includes the equity investment in limited liability companies that own
two
parking garages.
|
|
|
(6)
|
The Company acquired additional ownership interests in an existing building bringing the Company's ownership to
69.4%
.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the estimated relative fair values of the assets acquired and liabilities assumed in the real estate acquisitions for
2017
as of the acquisition date:
|
|
|
|
|
|
|
|
|
Estimated Fair Value
|
|
|
Estimated Useful Life
|
|
|
(In millions)
|
|
(In years)
|
Building
|
$
|
272.1
|
|
|
15.0-37.0
|
|
Land
|
11.7
|
|
|
—
|
|
Land Improvements
|
1.6
|
|
|
5.0-12.0
|
|
Intangibles:
|
|
|
|
At-market lease intangibles
|
37.2
|
|
|
2.1-12.6
|
|
Below-market lease intangibles
|
(0.9
|
)
|
|
8.5-15.0
|
|
Below-market ground lease intangibles
|
0.4
|
|
|
36.8-99.0
|
|
Total intangibles
|
36.7
|
|
|
|
Mortgage notes payable assumed, including fair value adjustments
|
(46.4
|
)
|
|
|
Other assets acquired
|
0.4
|
|
|
|
Equity investment in joint ventures
|
8.7
|
|
|
|
Accounts payable, accrued liabilities and other liabilities assumed
|
(1.7
|
)
|
|
|
Total cash paid
|
$
|
283.1
|
|
|
|
2016 Real Estate Acquisitions
The following table details the Company's acquisitions for the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Type
(1)
|
|
Date
Acquired
|
|
Purchase Price
|
|
|
Mortgage
Notes Payable Assumed
(2)
|
|
|
Cash
Consideration
(3)
|
|
|
Real
Estate
|
|
|
Other
(4)
|
|
|
Square
Footage
(unaudited)
|
|
Real estate acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
Seattle, Washington
|
MOB
|
|
3/31/16
|
|
$
|
38.3
|
|
|
$
|
—
|
|
|
$
|
37.7
|
|
|
$
|
37.7
|
|
|
$
|
—
|
|
|
69,712
|
|
Seattle, Washington
|
MOB
|
|
4/29/16
|
|
21.6
|
|
|
—
|
|
|
18.8
|
|
|
20.1
|
|
|
(1.3
|
)
|
|
46,637
|
|
Los Angeles, California
|
MOB
|
|
5/13/16
|
|
20.0
|
|
|
(13.2
|
)
|
|
6.5
|
|
|
20.4
|
|
|
(0.7
|
)
|
|
63,012
|
|
Seattle, Washington
|
MOB
|
|
9/12/16
|
|
53.1
|
|
|
—
|
|
|
53.0
|
|
|
54.6
|
|
|
(1.6
|
)
|
|
87,462
|
|
Washington, D.C.
(5)
|
MOB
|
|
9/26/16
|
|
45.2
|
|
|
—
|
|
|
45.1
|
|
|
43.7
|
|
|
1.4
|
|
|
103,783
|
|
Baltimore, Maryland
(6)
|
MOB
|
|
10/11/16
|
|
36.2
|
|
|
—
|
|
|
36.4
|
|
|
36.4
|
|
|
—
|
|
|
113,631
|
|
Seattle, Washington
|
MOB
|
|
10/17/16
|
|
9.8
|
|
|
—
|
|
|
9.8
|
|
|
9.9
|
|
|
(0.1
|
)
|
|
29,753
|
|
Seattle, Washington
|
MOB
|
|
12/21/16
|
|
5.1
|
|
|
—
|
|
|
5.1
|
|
|
5.2
|
|
|
(0.1
|
)
|
|
20,740
|
|
St. Paul, Minnesota
|
MOB
|
|
12/21/16
|
|
12.6
|
|
|
—
|
|
|
12.5
|
|
|
11.3
|
|
|
1.2
|
|
|
48,281
|
|
|
|
$
|
241.9
|
|
|
$
|
(13.2
|
)
|
|
$
|
224.9
|
|
|
$
|
239.3
|
|
|
$
|
(1.2
|
)
|
|
583,011
|
|
______
|
|
(1)
|
MOB = medical office building
|
|
|
(2)
|
The mortgage notes payable assumed in the acquisitions do not reflect the fair value adjustments totaling
$0.8 million
recorded by the Company upon acquisition (included in Other).
|
|
|
(3)
|
Excludes prorations of revenue and expense due to/from seller at the time of the acquisition.
|
|
|
(4)
|
Includes other assets acquired, liabilities assumed, intangibles recognized at acquisition and fair value adjustments on debt assumed.
|
|
|
(5)
|
A director of the Company serves as the Chief Executive Officer of the Inova Health System. As part of this transaction, the Company assumed a ground lease and tenant leases with Loudon Hospital Center, an affiliate of Inova Health System.
|
|
|
(6)
|
Includes two properties.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the estimated relative fair values of the assets acquired and liabilities assumed in the real estate acquisitions for
2016
as of the acquisition date:
|
|
|
|
|
|
|
|
|
Estimated Fair Value
|
|
|
Estimated Useful Life
|
|
|
(In millions)
|
|
(In years)
|
Building
|
$
|
216.8
|
|
|
20.0-35.0
|
|
Land
|
9.7
|
|
|
—
|
|
Intangibles:
|
|
|
|
At-market lease intangibles
|
12.8
|
|
|
2.7-10.3
|
|
Above-market lease intangibles
|
0.9
|
|
|
0.7-3.8
|
|
Below-market lease intangibles
|
(0.4
|
)
|
|
1.4-9.4
|
|
Above-market ground lease intangibles
|
(1.6
|
)
|
|
99.0
|
|
Below-market ground lease intangibles
|
2.0
|
|
|
36.8-99.0
|
|
Total intangibles
|
13.7
|
|
|
|
Mortgage notes payable assumed, including fair value adjustments
|
(14.0
|
)
|
|
|
Other assets acquired
|
0.5
|
|
|
|
Accounts payable, accrued liabilities and other liabilities assumed
|
(1.8
|
)
|
|
|
Total cash paid
|
$
|
224.9
|
|
|
|
2017 Real Estate Asset Dispositions
The following table details the Company's dispositions for the year ended
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Type
(1)
|
|
Date
Disposed
|
|
Sales Price
|
|
Closing Adjustments
|
|
Net
Proceeds
|
|
Net Real
Estate
Investment
|
|
Other
(including
receivables)
(3)
|
|
Gain/
(Impairment)
|
|
Square
Footage
(
Unaudited
)
|
Real estate dispositions
|
Evansville, Indiana
|
OTH
|
|
3/6/17
|
|
$
|
6.4
|
|
|
$
|
—
|
|
|
$
|
6.4
|
|
|
$
|
1.1
|
|
|
$
|
—
|
|
|
$
|
5.3
|
|
|
29,500
|
|
Columbus, Georgia
(2)
|
MOB
|
|
3/7/17
|
|
0.6
|
|
|
—
|
|
|
0.6
|
|
|
0.6
|
|
|
—
|
|
|
—
|
|
|
12,000
|
|
Las Vegas, Nevada
(2)
|
MOB
|
|
3/30/17
|
|
5.5
|
|
|
(0.7
|
)
|
|
4.8
|
|
|
2.2
|
|
|
0.3
|
|
|
2.3
|
|
|
18,147
|
|
Texas (3 properties)
|
IRF
|
|
3/31/17
|
|
69.5
|
|
|
(1.6
|
)
|
|
67.9
|
|
|
46.9
|
|
|
5.2
|
|
|
15.8
|
|
|
169,722
|
|
Chicago, Illinois
(4)
|
MOB
|
|
6/16/17
|
|
0.5
|
|
|
(0.1
|
)
|
|
0.4
|
|
|
0.4
|
|
|
—
|
|
|
—
|
|
|
5,100
|
|
San Antonio, Texas
|
IRF
|
|
6/29/17
|
|
14.5
|
|
|
(0.2
|
)
|
|
14.3
|
|
|
5.1
|
|
|
0.9
|
|
|
8.3
|
|
|
39,786
|
|
Roseburg, Oregon
|
MOB
|
|
6/29/17
|
|
23.2
|
|
|
(0.6
|
)
|
|
22.6
|
|
|
14.5
|
|
|
0.3
|
|
|
7.8
|
|
|
62,246
|
|
St. Louis, Missouri
|
MOB
|
|
9/7/17
|
|
2.5
|
|
|
(0.1
|
)
|
|
2.4
|
|
|
7.4
|
|
|
0.1
|
|
|
(5.1
|
)
|
|
79,980
|
|
Total dispositions
|
|
$
|
122.7
|
|
|
$
|
(3.3
|
)
|
|
$
|
119.4
|
|
|
$
|
78.2
|
|
|
$
|
6.8
|
|
|
$
|
34.4
|
|
|
416,481
|
|
______
|
|
(1)
|
MOB = medical office building; IRF = inpatient rehabilitation facility; OTH = other
|
|
|
(2)
|
Previously classified as held for sale.
|
|
|
(3)
|
Includes straight-line rent receivables, leasing commissions and lease inducements.
|
|
|
(4)
|
The Company recorded an impairment of approximately
$0.3 million
in the first quarter of 2017 upon management's decision to sell.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2016 Real Estate Asset Dispositions
The following table details the Company's dispositions for the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Type
(1)
|
|
Date
Disposed
|
|
Sales Price
|
|
Closing Adjustments
|
|
Net
Proceeds
|
|
Net Real
Estate
Investment
|
|
Other
(including
receivables)
(2)
|
|
Gain
|
|
Square
Footage
(
Unaudited
)
|
Real estate dispositions
|
Kansas City, Kansas
|
MOB
|
|
10/14/16
|
|
$
|
15.1
|
|
|
$
|
—
|
|
|
$
|
15.1
|
|
|
$
|
7.2
|
|
|
$
|
0.3
|
|
|
$
|
7.6
|
|
|
70,908
|
|
Nashville, Tennessee
|
MOB
|
|
10/28/16
|
|
8.8
|
|
|
(0.2
|
)
|
|
8.6
|
|
|
6.3
|
|
|
0.2
|
|
|
2.1
|
|
|
45,274
|
|
Altoona, Pennsylvania
|
IRF
|
|
12/20/16
|
|
21.5
|
|
|
(0.4
|
)
|
|
21.1
|
|
|
12.4
|
|
|
0.6
|
|
|
8.1
|
|
|
64,032
|
|
Harrisburg, Pennsylvania
|
IRF
|
|
12/20/16
|
|
24.2
|
|
|
(0.6
|
)
|
|
23.6
|
|
|
8.2
|
|
|
0.4
|
|
|
15.0
|
|
|
79,836
|
|
Phoenix, Arizona
|
IRF
|
|
12/20/16
|
|
22.3
|
|
|
—
|
|
|
22.3
|
|
|
13.5
|
|
|
1.4
|
|
|
7.4
|
|
|
51,903
|
|
Atlanta, Georgia
|
MOB
|
|
12/22/16
|
|
2.8
|
|
|
(0.2
|
)
|
|
2.6
|
|
|
1.8
|
|
|
—
|
|
|
0.8
|
|
|
8,749
|
|
Total dispositions
|
|
$
|
94.7
|
|
|
$
|
(1.4
|
)
|
|
$
|
93.3
|
|
|
$
|
49.4
|
|
|
$
|
2.9
|
|
|
$
|
41.0
|
|
|
320,702
|
|
______
|
|
(1)
|
MOB = medical office building; IRF = inpatient rehabilitation facility
|
|
|
(2)
|
Includes straight-line rent receivables, leasing commissions and lease inducements.
|
Potential Dispositions
In October 2017, the Company received notice that a tenant is exercising a purchase option on
seven
properties, comprised of
five
single-tenant net leased buildings and
two
multi-tenanted buildings, covered by
one
purchase option with a stated purchase price of approximately
$45.5 million
, subject to certain contractual adjustments. The Company's aggregate net book value for these properties, which were classified as held for sale upon receiving notice of the purchase option exercise, was
$23.9 million
at
December 31, 2017
.
5. Held for Sale and Discontinued Operations
Assets and liabilities of properties sold or classified as held for sale are separately identified on the Company’s Consolidated Balance Sheets in the current period. During 2017, the Company reclassified
eight
properties to held for sale. See "Potential Dispositions" in Note 4 for more information regarding
seven
of these properties. As of
December 31, 2017
and
2016
, the Company had
eight
and
two
properties, respectively, classified as held for sale.
During 2017, the Company sold the property remaining in assets held for sale that was classified as discontinued operations prior to the adoption of Accounting Standards Update No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. None of the Company's
2016
or
2017
dispositions or assets classified as held for sale represented a strategic shift that had or will have a major effect on the Company's operations and financial results. Therefore, the
2016
and
2017
dispositions were not classified as discontinued operations. The table below reflects the assets and liabilities of the properties classified as held for sale and discontinued operations as of
December 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
December 31,
|
(Dollars in thousands)
|
2017
|
|
|
2016
|
|
Balance Sheet data
|
|
|
|
Land
|
$
|
4,636
|
|
|
$
|
1,362
|
|
Buildings, improvements and lease intangibles
|
63,654
|
|
|
4,410
|
|
Personal property
|
82
|
|
|
—
|
|
|
68,372
|
|
|
5,772
|
|
Accumulated depreciation
|
(35,790
|
)
|
|
(2,977
|
)
|
Assets held for sale, net
|
32,582
|
|
|
2,795
|
|
Other assets, net (including receivables)
|
565
|
|
|
297
|
|
Assets of discontinued operations, net
|
565
|
|
|
297
|
|
Assets held for sale and discontinued operations, net
|
$
|
33,147
|
|
|
$
|
3,092
|
|
Accounts payable and accrued liabilities
|
$
|
38
|
|
|
$
|
22
|
|
Other liabilities
|
55
|
|
|
592
|
|
Liabilities of assets held for sale and discontinued operations
|
$
|
93
|
|
|
$
|
614
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The table below reflects the results of operations of the properties included in discontinued operations on the Company’s Consolidated Statements of Income for the years ended
December 31, 2017
,
2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Dollars in thousands, except per share data)
|
2017
|
|
|
2016
|
|
|
2015
|
|
Statements of Income data:
|
|
|
|
|
|
Revenues
(1)
|
|
|
|
|
|
Rental income
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
752
|
|
Other operating
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
752
|
|
Expenses
(2)
|
|
|
|
|
|
Property operating
|
19
|
|
|
71
|
|
|
58
|
|
Bad debt, net of recoveries
|
(10
|
)
|
|
—
|
|
|
(1
|
)
|
|
9
|
|
|
71
|
|
|
57
|
|
Other Income (Expense)
(3)
|
|
|
|
|
|
Interest and other income, net
|
—
|
|
|
—
|
|
|
20
|
|
|
—
|
|
|
—
|
|
|
20
|
|
Income (Loss) from Discontinued Operations
|
(9
|
)
|
|
(71
|
)
|
|
715
|
|
Impairments
(4)
|
—
|
|
|
(121
|
)
|
|
(686
|
)
|
Gain on sales of real estate properties
(5)
|
5
|
|
|
7
|
|
|
10,571
|
|
Income (Loss) from Discontinued Operations
|
$
|
(4
|
)
|
|
$
|
(185
|
)
|
|
$
|
10,600
|
|
Income (Loss) from Discontinued Operations per Common Share - Basic
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.11
|
|
Income (Loss) from Discontinued Operations per Common Share - Diluted
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.11
|
|
______
|
|
(1)
|
Total revenues for the year ended December 31,
2015
included
$0.8 million
related to properties sold.
|
|
|
(2)
|
Total expenses for the year ended December 31, 2016 included
$0.1 million
related to a property that is held for sale. Total expenses for the year ended December 31, 2015 included
$0.1 million
related to properties sold.
|
|
|
(3)
|
Other income (expense) for the year ended December 31, 2015 included income (expense) related to properties sold.
|
|
|
(4)
|
Impairments for the years ended
December 31, 2016
and 2015 included
$0.1 million
and
$0.7 million
, respectively, related to
one
property sold.
|
|
|
(5)
|
Gain on sales of real estate properties for the year ended December 31, 2017 included a gain on the sale of
one
property sold in 2017. Gain on sales of real estate properties for the year ended December 31, 2016 included a gain on the sale of
one
property sold in 2015. Gains on the sales of real estate properties for the year ended December 31,
2015
included gains on the sale of
one
property.
|
6. Impairment Charges
An asset is impaired when undiscounted cash flows expected to be generated by the asset are less than the carrying value of the asset. The Company must assess the potential for impairment of its long-lived assets, including real estate properties, whenever events occur or there is a change in circumstances, such as the sale of a property or the decision to sell a property, that indicate that the recorded value might not be fully recoverable.
The Company recorded impairment charges on properties sold or classified as held for sale, included in discontinued operations, for the years ended December 31,
2016
and
2015
totaling
$0.1 million
and
$0.7 million
, respectively. The Company recorded impairment charges on
two
properties sold in 2017 and
two
properties sold in 2015, included in continuing operations, for the years ended December 31, 2017 and 2015 totaling
$5.4 million
and
$3.6 million
, respectively. Both level 1 and level 3 fair value techniques were used to derive these impairment charges.
7. Other Assets
Other assets consist primarily of straight-line rent receivables, prepaids, intangible assets, deferred financing costs and accounts receivable. Items included in "Other assets, net" on the Company’s Consolidated Balance Sheets
as of
December 31, 2017
and
2016
are detailed in the table below:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(Dollars in millions)
|
2017
|
|
|
2016
|
|
Prepaid assets
|
$
|
65.2
|
|
|
$
|
64.8
|
|
Equity investment in joint ventures
|
8.7
|
|
|
—
|
|
Straight-line rent receivables
|
67.0
|
|
|
64.6
|
|
Above-market intangible assets, net
|
17.9
|
|
|
19.1
|
|
Additional long-lived assets, net
|
24.9
|
|
|
14.5
|
|
Ground lease modification, net
|
10.3
|
|
|
10.8
|
|
Accounts receivable
|
7.4
|
|
|
8.1
|
|
Allowance for uncollectible accounts
|
(0.3
|
)
|
|
(0.1
|
)
|
Credit facility deferred financing costs
|
3.5
|
|
|
4.9
|
|
Goodwill
|
3.5
|
|
|
3.5
|
|
Customer relationship intangible assets, net
|
1.7
|
|
|
1.8
|
|
Other
|
3.2
|
|
|
3.7
|
|
|
$
|
213.0
|
|
|
$
|
195.7
|
|
Unconsolidated Joint Ventures
During the fourth quarter of 2017, the Company purchased a non-managing membership interest in LLCs that own
two
parking garages in Atlanta, Georgia for
$8.7 million
which is included in the equity investment in joint ventures line in the table above. The parking garage interests were purchased in connection with
three
buildings that were acquired in the fourth quarter of 2017. The Company's investment in and income (loss) recognized for the year ended December 31, 2017 related to its LLCs accounted for under the equity method are shown in the table below:
|
|
|
|
|
(Dollars in millions)
|
December 31, 2017
|
Net LLC investment, beginning of period
|
$
|
—
|
|
New investments during the period
|
8.7
|
|
Equity income (loss) recognized during the period
|
—
|
|
Net LLC investments, end of period
|
$
|
8.7
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8. Intangible Assets and Liabilities
The Company has several types of intangible assets and liabilities included in its Consolidated Balance Sheets, including goodwill, deferred financing costs, above-, below-, and at-market lease intangibles, and customer relationship intangibles. The Company’s intangible assets and liabilities as of
December 31, 2017
and
2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Balance at December 31,
|
|
Accumulated Amortization at December 31,
|
|
Weighted
Avg. Remaining Life
(Years)
|
|
Balance Sheet
Classification
|
(Dollars in millions)
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
Goodwill
|
$
|
3.5
|
|
|
$
|
3.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
N/A
|
|
Other assets
|
Credit facility deferred financing costs
|
5.4
|
|
|
5.4
|
|
|
1.9
|
|
|
0.5
|
|
|
2.6
|
|
Other assets
|
Above-market lease intangibles
|
22.9
|
|
|
24.5
|
|
|
5.0
|
|
|
5.4
|
|
|
57.8
|
|
Other assets
|
Customer relationship intangibles
|
2.6
|
|
|
2.6
|
|
|
0.9
|
|
|
0.8
|
|
|
25.6
|
|
Other assets
|
Below-market lease intangibles
|
(9.5
|
)
|
|
(8.8
|
)
|
|
(3.5
|
)
|
|
(3.2
|
)
|
|
36.5
|
|
Other liabilities
|
Deferred financing costs
|
9.3
|
|
|
9.4
|
|
|
1.8
|
|
|
4.0
|
|
|
4.5
|
|
Notes and Bonds Payable
|
At-market lease intangibles
|
110.0
|
|
|
84.1
|
|
|
41.6
|
|
|
39.0
|
|
|
5.6
|
|
Real estate properties
|
|
$
|
144.2
|
|
|
$
|
120.7
|
|
|
$
|
47.7
|
|
|
$
|
46.5
|
|
|
15.2
|
|
|
The following table represents expected amortization over the next five years of the Company’s intangible assets and liabilities in place as of
December 31, 2017
:
|
|
|
|
|
(Dollars in millions)
|
Future Amortization of Intangibles, net
|
|
2018
|
$
|
19.8
|
|
2019
|
17.6
|
|
2020
|
12.0
|
|
2021
|
6.8
|
|
2022
|
5.8
|
|
9. Notes and Bonds Payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
Maturity
Dates
|
|
Contractual
Interest Rates
|
|
|
Principal
Payments
|
|
Interest
Payments
|
(Dollars in thousands)
|
2017
|
|
|
2016
|
|
|
|
Unsecured Credit Facility
|
$
|
189,000
|
|
|
$
|
107,000
|
|
7/20
|
|
LIBOR + 1.00%
|
|
|
At maturity
|
|
Monthly
|
Unsecured Term Loan due 2022
(1)
|
148,994
|
|
|
149,491
|
|
12/22
|
|
LIBOR + 1.10%
|
|
|
At maturity
|
|
Monthly
|
Senior Notes due 2021
(1)
|
—
|
|
|
397,147
|
|
1/21
|
|
5.75
|
%
|
|
At maturity
|
|
Semi-Annual
|
Senior Notes due 2023
(1)
|
247,703
|
|
|
247,296
|
|
4/23
|
|
3.75
|
%
|
|
At maturity
|
|
Semi-Annual
|
Senior Notes due 2025
(1)
|
248,044
|
|
|
247,819
|
|
5/25
|
|
3.88
|
%
|
|
At maturity
|
|
Semi-Annual
|
Senior Notes due 2028
(1)
|
294,757
|
|
|
—
|
|
1/28
|
|
3.63
|
%
|
|
At maturity
|
|
Semi-Annual
|
Mortgage notes payable
(2)
|
155,382
|
|
|
115,617
|
|
12/18-5/40
|
|
3.31%-6.88%
|
|
|
Monthly
|
|
Monthly
|
|
$
|
1,283,880
|
|
|
$
|
1,264,370
|
|
|
|
|
|
|
|
|
______
|
|
(1)
|
Balances are shown net of discounts and unamortized issuance costs.
|
|
|
(2)
|
Balances are shown net of discounts and unamortized issuance costs and including premiums.
|
The Company’s various debt agreements contain certain representations, warranties, and financial and other covenants customary in such loan agreements. Among other things, these provisions require the Company to maintain certain financial ratios and impose certain limits on the Company’s ability to incur indebtedness and create liens or encumbrances. As of
December 31, 2017
, the Company was in compliance with its financial covenant provisions under its various debt instruments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Unsecured Credit Facility due 2020
On October 14, 2011, the Company entered into a
$700.0 million
unsecured credit facility with a syndicate of lenders (the "Unsecured Credit Facility"). On July 29, 2016, the Company entered into the third amendment to the Unsecured Credit Facility to extend the maturity date to July 2020. The credit facility agreement provides the Company with
two
six
-month extension options that could extend the maturity date to July 2021. Each option is subject to an extension fee of
0.075%
of the aggregate commitments. Amounts outstanding under the Unsecured Credit Facility bear interest at LIBOR plus an applicable margin rate. The margin rate, which depends on the Company's credit ratings, ranges from
0.83%
to
1.55%
(
1.00%
as of
December 31, 2017
). In addition, the Company pays a facility fee per annum on the aggregate amount of commitments ranging from
0.13%
to
0.30%
(
0.20%
as of
December 31, 2017
).
As of
December 31, 2017
, the Company had
$189.0 million
outstanding under the Unsecured Credit Facility with an effective interest rate of approximately
2.56%
and had a remaining borrowing capacity of approximately
$511.0 million
.
Unsecured Term Loan due 2022
In February 2014, the Company entered into a
$200.0 million
unsecured term loan with a syndicate of
nine
lenders. On July 5, 2016, the Company repaid
$50.0 million
of the outstanding principal. On December 18, 2017, the Company entered into an amendment to the unsecured term loan due 2022 (the "Unsecured Term Loan due 2022") with a syndicate of
nine
lenders to extend the maturity date to December 2022. The Unsecured Term Loan due 2022 bears interest at a rate equal to (x) LIBOR plus (y) a margin ranging from
0.90%
to
1.75%
(
1.10%
as of
December 31, 2017
) based upon the Company's unsecured debt ratings. Payments under the Unsecured Term Loan due 2022 are interest only, with the full amount of the principal due at maturity. The Unsecured Term Loan due 2022 may be prepaid at any time, without penalty. The proceeds from the Unsecured Term Loan due 2022 were used by the Company to repay borrowings on the Unsecured Credit Facility. The Unsecured Term Loan due 2022 has various financial covenant provisions that are required to be met on a quarterly and annual basis that are equivalent to those of the Unsecured Credit Facility. On December 20, 2017, the Company entered into
two
interest rate swaps totaling
$25.0 million
to hedge the 1-month LIBOR portion of the cost of borrowing under the Unsecured Term Loan due 2022 to a fixed interest rate of
2.18%
(plus the applicable margin rate) through December 2022. On January 30, 2018, the Company entered into
two
additional interest rate swaps totaling
$50.0 million
to hedge the 1-month LIBOR portion of the cost of borrowing under the Unsecured Term Loan due 2022 to a fixed interest rate of
2.46%
(plus the applicable margin rate) through December 2022. The outstanding balance on the Unsecured Term Loan due 2022 was
$150.0 million
as of
December 31, 2017
with an effective interest rate of approximately
2.77%
including the impact of the interest rate swaps.
Senior Notes due 2021 Redemption
During the fourth quarter of 2017, the Company redeemed the outstanding principal of
$400.0 million
on its Senior Notes due 2021 in
two
transactions. On November 1, 2017 and December 27, 2017, the Company redeemed
$100.0 million
and
$300.0 million
, respectively. The aggregate redemption price of
$452.3 million
, consisting of outstanding principal of
$400.0 million
, accrued interest of
$9.5 million
, and a "make-whole" amount of approximately
$42.8 million
for the early extinguishment of debt. The unaccreted discount and unamortized costs on these notes of
$2.2 million
was written off upon redemption. The Company recognized a loss on early extinguishment of debt of approximately
$45.0 million
related to this redemption.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table reconciles the balance of the Senior Notes due 2021 on the Company’s Consolidated Balance Sheets as of
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(Dollars in thousands)
|
2017
|
|
|
2016
|
|
Senior Notes due 2021 face value
|
$
|
—
|
|
|
$
|
400,000
|
|
Unaccreted discount
|
—
|
|
|
(1,510
|
)
|
Issuance costs
|
—
|
|
|
(1,343
|
)
|
Senior Notes due 2021 carrying amount
|
$
|
—
|
|
|
$
|
397,147
|
|
Senior Notes due 2023
On March 26, 2013, the Company issued
$250.0 million
of unsecured senior notes due 2023 (the "Senior Notes due 2023") in a registered public offering. The Senior Notes due 2023 bear interest at
3.75%
, payable semi-annually on April 15 and October 15, beginning October 15, 2013, and are due on April 15, 2023, unless redeemed earlier by the Company. The notes were issued at a discount of approximately
$2.1 million
and the Company incurred debt issuance cost of
$2.1 million
, which yielded a
3.95%
interest rate per annum upon issuance. For each of the years ended
December 31, 2017
,
2016
and
2015
, the Company amortized approximately
$0.2 million
of the discount and
$0.2 million
of the debt issuance cost which are included in interest expense on the Company’s Consolidated Statements of Income. The following table reconciles the balance of the Senior Notes due 2023 on the Company’s Consolidated Balance Sheets as of
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(Dollars in thousands)
|
2017
|
|
|
2016
|
|
Senior Notes due 2023 face value
|
$
|
250,000
|
|
|
$
|
250,000
|
|
Unaccreted discount
|
(1,178
|
)
|
|
(1,375
|
)
|
Issuance costs
|
(1,119
|
)
|
|
(1,329
|
)
|
Senior Notes due 2023 carrying amount
|
$
|
247,703
|
|
|
$
|
247,296
|
|
Senior Notes due 2025
On April 24, 2015, the Company issued
$250.0 million
of unsecured senior notes due 2025 (the "Senior Notes due 2025") in a registered public offering. The Senior Notes due 2025 bear interest at
3.875%
, payable semi-annually on May 1 and November 1, beginning November 1, 2015, and are due on May 1, 2025, unless redeemed earlier by the Company. The notes were issued at a discount of approximately
$0.2 million
and the Company incurred approximately
$2.3 million
in debt issuance costs which yielded a
4.08%
interest rate per annum upon issuance. For the years ended
December 31, 2017
,
2016
, and
2015
the Company amortized approximately
$0.2 million
, $
0.2 million
, and $
0.1 million
, respectively, of the debt issuance costs which is included in interest expense on the Company's Consolidated Statements of Income. Concurrent with this transaction, the Company settled
four
forward starting swap agreements for
$1.7 million
. The Senior Notes due 2025 have various financial covenants that are required to be met on a quarterly and annual basis. The following table reconciles the balance of the Senior Notes due 2025 on the Company’s Consolidated Balance Sheets as of
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(Dollars in thousands)
|
2017
|
|
|
2016
|
|
Senior Notes due 2025 face value
|
$
|
250,000
|
|
|
$
|
250,000
|
|
Unaccreted discount
|
(160
|
)
|
|
(178
|
)
|
Issuance costs
|
(1,796
|
)
|
|
(2,003
|
)
|
Senior Notes due 2025 carrying amount
|
$
|
248,044
|
|
|
$
|
247,819
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Senior Notes due 2028
On December 11, 2017, the Company issued
$300.0 million
of unsecured Senior Notes due 2028 (the "Senior Notes due 2028") in a registered public offering. The Senior Notes due 2028 bear interest at
3.625%
, payable semi-annually on January 15 and July 15, beginning July 15, 2018, and are due on January 15, 2028, unless redeemed earlier by the Company. The notes were issued at a discount of approximately
$2.5 million
and the Company incurred approximately
$2.7 million
in debt issuance costs which yielded a
3.84%
interest rate per annum upon issuance. The Senior Notes due 2028 have various financial covenants that are required to be met on a quarterly and annual basis. The following table reconciles the balance of the Senior Notes due 2028 on the Company’s Consolidated Balance Sheets as of
December 31, 2017
:
|
|
|
|
|
(Dollars in thousands)
|
December 31, 2017
|
Senior Notes due 2028 face value
|
$
|
300,000
|
|
Unaccreted discount
|
(2,529
|
)
|
Issuance costs
|
$
|
(2,714
|
)
|
Senior Notes due 2028 carrying amount
|
$
|
294,757
|
|
Mortgage Notes Payable
The following table reconciles the Company’s aggregate mortgage notes principal balance with the Company’s Consolidated Balance Sheets as of
December 31, 2017
and
2016
. For the years ended
December 31, 2017
,
2016
and
2015
, the Company amortized approximately
$0.3 million
,
$0.3 million
and
$0.8 million
of the discount and
$0.7 million
,
$0.9 million
, and
$1.0 million
of the premium. For the years ended December 31, 2017, 2016 and 2015, the Company also amortized approximately
$0.1 million
,
$0.2 million
, and
$0.2 million
of the debt issuance costs, respectively, on the mortgage notes payable which is included in interest expense on the Company’s Consolidated Statements of Income.
|
|
|
|
|
|
|
|
|
|
December 31,
|
(Dollars in thousands)
|
2017
|
|
|
2016
|
|
Mortgage notes payable principal balance
|
$
|
154,916
|
|
|
$
|
114,934
|
|
Unamortized premium
|
2,651
|
|
|
2,569
|
|
Unaccreted discount
|
(1,332
|
)
|
|
(1,450
|
)
|
Issuance costs
|
(853
|
)
|
|
(436
|
)
|
Mortgage notes payable carrying amount
|
$
|
155,382
|
|
|
$
|
115,617
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table details the Company’s mortgage notes payable, with related collateral.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original Balance
|
|
|
Effective Interest Rate
(23)
|
|
|
Maturity
Date
|
|
Collateral
(24)
|
|
Principal and Interest Payments
(22)
|
|
Investment in Collateral at December 31,
|
|
|
Balance at December 31,
|
(Dollars in millions)
|
|
|
|
|
|
2017
|
|
|
2017
|
|
|
2016
|
|
Life Insurance Co.
(1)
|
7.0
|
|
|
5.53
|
%
|
|
1/18
|
|
MOB
|
|
Monthly/15-yr amort.
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.7
|
|
Commercial Bank
(2)
|
1.8
|
|
|
5.55
|
%
|
|
10/30
|
|
OTH
|
|
Monthly/27-yr amort.
|
|
—
|
|
|
—
|
|
|
1.3
|
|
Insurance Co.
(3)
|
7.3
|
|
|
5.54
|
%
|
|
12/18
|
|
MOB
|
|
Monthly/25-yr amort.
|
|
14.3
|
|
|
6.0
|
|
|
6.2
|
|
Commercial Bank
(4)
|
9.5
|
|
|
5.07
|
%
|
|
3/19
|
|
MOB
|
|
Monthly/5-yr amort.
|
|
13.9
|
|
|
9.3
|
|
|
9.5
|
|
Commercial Bank
(5)
|
9.4
|
|
|
4.55
|
%
|
|
7/19
|
|
MOB
|
|
Monthly/8-yr amort
|
|
27.8
|
|
|
9.2
|
|
|
9.3
|
|
Commercial Bank
(6)
|
15.2
|
|
|
7.65
|
%
|
|
7/20
|
|
MOB
|
|
(21)
|
|
20.2
|
|
|
12.7
|
|
|
12.7
|
|
Life Insurance Co.
(7)
|
7.9
|
|
|
4.00
|
%
|
|
8/20
|
|
MOB
|
|
Monthly/15-yr amort.
|
|
20.7
|
|
|
2.0
|
|
|
2.7
|
|
Life Insurance Co.
(8)
|
7.3
|
|
|
5.25
|
%
|
|
8/20
|
|
MOB
|
|
Monthly/27-yr amort.
|
|
17.9
|
|
|
6.5
|
|
|
6.7
|
|
Life Insurance Co.
(9)
|
5.6
|
|
|
4.27
|
%
|
|
1/21
|
|
MOB
|
|
Monthly/10-yr amort.
|
|
15.7
|
|
|
4.8
|
|
|
—
|
|
Commercial Bank
(10)
|
12.9
|
|
|
6.43
|
%
|
|
2/21
|
|
MOB
|
|
Monthly/12-yr amort.
|
|
54.9
|
|
|
10.5
|
|
|
10.7
|
|
Life Insurance Co.
(11)
|
11.0
|
|
|
3.85
|
%
|
|
11/22
|
|
MOB
|
|
Monthly/7-yr amort.
|
|
22.0
|
|
|
10.4
|
|
|
—
|
|
Life Insurance Co.
(12)
|
12.3
|
|
|
3.85
|
%
|
|
8/23
|
|
MOB
|
|
Monthly/7-yr amort.
|
|
24.6
|
|
|
11.5
|
|
|
—
|
|
Financial Services
(13)
|
12.4
|
|
|
4.27
|
%
|
|
10/23
|
|
MOB
|
|
Monthly/10-yr amort.
|
|
24.7
|
|
|
12.2
|
|
|
—
|
|
Life Insurance Co.
(14)
|
13.3
|
|
|
4.13
|
%
|
|
1/24
|
|
MOB
|
|
Monthly/10-yr amort.
|
|
21.1
|
|
|
13.3
|
|
|
13.6
|
|
Life Insurance Co.
(15)
|
6.8
|
|
|
3.94
|
%
|
|
2/24
|
|
MOB
|
|
Monthly/7-yr amort.
|
|
14.5
|
|
|
6.7
|
|
|
—
|
|
Financial Services
(16)
|
9.7
|
|
|
4.32
|
%
|
|
9/24
|
|
MOB
|
|
Monthly/10-yr amort.
|
|
16.4
|
|
|
8.8
|
|
|
9.1
|
|
Commercial Bank
|
11.5
|
|
|
3.71
|
%
|
|
1/26
|
|
MOB
|
|
Monthly/10-yr amort.
|
|
37.9
|
|
|
10.5
|
|
|
11.0
|
|
Commercial Bank
(17)
|
15.0
|
|
|
5.25
|
%
|
|
4/27
|
|
MOB
|
|
Monthly/20-yr amort.
|
|
33.4
|
|
|
9.6
|
|
|
10.4
|
|
Municipal Government
(18) (19)
|
11.0
|
|
|
4.79
|
%
|
|
(20)
|
|
MOB
|
|
Semi-Annual
(20)
|
|
20.9
|
|
|
11.4
|
|
|
11.7
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
400.9
|
|
|
$
|
155.4
|
|
|
$
|
115.6
|
|
______
|
|
(1)
|
The Company repaid this mortgage note in October 2017. The Company's unencumbered gross investment was
$14.3 million
at December 31, 2017.
|
|
|
(2)
|
The Company repaid this mortgage note in September 2017. The Company's unencumbered gross investment was
$8.0 million
at December 31, 2017.
|
|
|
(3)
|
The unamortized portion of the
$0.6 million
premium recorded on this note upon acquisition is included in the balance above.
|
|
|
(4)
|
The unamortized portion of the
$0.2 million
premium recorded on this note upon acquisition is included in the balance above.
|
|
|
(5)
|
The unamortized portion of the
$0.3 million
premium recorded on this note upon acquisition is included in the balance above.
|
|
|
(6)
|
The unaccreted portion of the
$2.4 million
discount recorded on this note upon acquisition is included in the balance above.
|
|
|
(7)
|
The unamortized portion of the
$0.3 million
premium recorded on this note upon acquisition is included in the balance above.
|
|
|
(8)
|
The unamortized portion of the
$0.4 million
premium recorded on this note upon acquisition is included in the balance above.
|
|
|
(9)
|
The unamortized portion of the
$0.2 million
premium recorded on this note upon acquisition is included in the balance above.
|
|
|
(10)
|
The unaccreted portion of the
$1.0 million
discount recorded on this note upon acquisition is included in the balance above.
|
|
|
(11)
|
The unaccreted portion of the
$0.1 million
discount recorded on this note upon acquisition is included in the balance above.
|
|
|
(12)
|
The unaccreted portion of the
$0.2 million
discount recorded on this note upon acquisition is included in the balance above.
|
|
|
(13)
|
The unamortized portion of the
$0.4 million
premium recorded upon acquisition is included in the balance above.
|
|
|
(14)
|
The unamortized portion of the
$0.8 million
premium recorded on this note upon acquisition is included in the balance above.
|
|
|
(15)
|
The unamortized portion of the
$0.2 million
premium recorded on this note upon acquisition is included in the balance above.
|
|
|
(16)
|
The unamortized portion of the
$0.1 million
premium recorded on this note upon acquisition is included in the balance above.
|
|
|
(17)
|
The unamortized portion of the
$0.7 million
premium recorded on this note upon acquisition is included in the balance above.
|
|
|
(18)
|
Balance consists of
three
notes secured by the same building.
|
|
|
(19)
|
The unamortized portion of the
$1.0 million
premium recorded on the three notes upon acquisition is included in the balance above.
|
|
|
(20)
|
These
three
mortgage notes payable are series municipal bonds that have maturity dates ranging from from May 2022 to May 2040. One of the four original notes payable was repaid upon maturity in May 2017. The remaining
three
require interest only payments and have future maturity dates but allow repayment after May 2020 without penalty. The Company intends on repaying all
three
notes payable at that time.
|
|
|
(21)
|
Payable in monthly installments of interest only for
24
months and then installments of principal and interest based on an
11
-year amortization with the final payment due at maturity.
|
|
|
(22)
|
Payable in monthly installments of principal and interest with the final payment due at maturity (unless otherwise noted).
|
|
|
(23)
|
The contractual interest rates for the
19
outstanding mortgage notes ranged from
3.3%
to
6.9%
as of
December 31, 2017
.
|
|
|
(24)
|
MOB-Medical office building; OTH-Other.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Other Long-Term Debt Information
Future maturities of the Company’s notes and bonds payable as of
December 31, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Principal
Maturities
|
|
|
Net Accretion/
Amortization
(1)
|
|
|
Debt Issuance Costs (2)
|
|
|
Notes and Bonds Payable
|
|
%
|
|
2018
|
$
|
10,605
|
|
|
$
|
(18
|
)
|
|
$
|
(1,051
|
)
|
|
9,536
|
|
0.7
|
%
|
2019
|
22,711
|
|
|
(224
|
)
|
|
(1,044
|
)
|
|
21,443
|
|
1.7
|
%
|
2020
|
211,803
|
|
|
(382
|
)
|
|
(1,039
|
)
|
|
210,382
|
|
16.4
|
%
|
2021
|
17,321
|
|
|
(312
|
)
|
|
(1,025
|
)
|
|
15,984
|
|
1.2
|
%
|
2022
|
162,692
|
|
|
(328
|
)
|
|
(1,037
|
)
|
|
161,327
|
|
12.6
|
%
|
2023 and thereafter
|
868,784
|
|
|
(1,284
|
)
|
|
(2,292
|
)
|
|
865,208
|
|
67.4
|
%
|
|
$
|
1,293,916
|
|
|
$
|
(2,548
|
)
|
|
$
|
(7,488
|
)
|
|
1,283,880
|
|
100.0
|
%
|
______
|
|
(1)
|
Includes discount accretion and premium amortization related to the Company’s Senior Notes due 2023, Senior Notes due 2025, Senior Notes due 2028 and
18
mortgage notes payable.
|
|
|
(2)
|
Excludes approximately
$3.5 million
in debt issuance costs related to the Company's Unsecured Credit Facility due 2020 included in other assets.
|
Note 10. Derivative Financial Instruments
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. During 2017, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income (Loss) and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.
During the year ended
December 31, 2017
, the Company entered into two outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
|
|
|
|
|
Interest Rate Derivative
|
Number of Instruments
|
|
Notional
(in millions)
|
Interest rate swaps
|
2
|
|
$25.0
|
During the year ended December 31, 2015, the Company entered into
four
forward starting interest rate swaps with a total notional value of
$225.0 million
to hedge the risk of changes in the interest-related cash flows associated with the potential issuance of long-term debt. That debt was issued in April 2015, as discussed in Note 9, and the forward starting interest rate swaps were terminated. As a result, the Company realized a loss at the termination date which was deferred and is being amortized over the term of the Senior Notes due 2025.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet
The table below presents the fair value of the Company's derivative financial instruments, as well as, their classification on the Consolidated Balance Sheets as of December 31, 2017.
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
As of December 31, 2017
|
(Dollars in thousands)
|
Balance Sheet Location
|
|
Fair Value
|
|
Derivatives designated as hedging instruments
|
|
|
|
Interest rate swaps
|
Other liabilities
|
|
$
|
67
|
|
Total derivatives designated as hedging instruments
|
|
|
$
|
67
|
|
Tabular Disclosure of the Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income (Loss)
The table below presents the effect of cash flow hedge accounting on Accumulated Other Comprehensive Income (Loss) as of December 31, 2017 related to the Company's outstanding interest rate swaps.
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Loss Recognized in OCI on Derivative
|
|
Amount of Loss Reclassified from OCI into Income
|
(Dollars in thousands)
|
2017
|
|
2017
|
|
2016
|
|
Interest rate products
|
$
|
74
|
|
Interest expense
|
$
|
7
|
|
$
|
—
|
|
Settled interest rate swaps
|
—
|
|
Interest expense
|
169
|
|
168
|
|
|
$
|
74
|
|
Total interest expense
|
$
|
176
|
|
$
|
168
|
|
Credit-risk-related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on the indebtedness.
As of December 31, 2017, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was
$0.1 million
. If the Company had breached any of these provisions at December 31, 2017, it could have been required to settle its obligations under the agreements at their termination value of
$0.1 million
.
The Company estimates that an additional
$0.3 million
will be reclassified from accumulated other comprehensive loss as an increase to interest expense over the next 12 months.
Subsequent Activity
On January 30, 2018, the Company entered into
two
interest rate derivatives that were designated as cash flow hedges of interest rate risk totaling
$50.0 million
. These derivatives were used to hedge variable cash flows associated with variable-rate debt.
11. Stockholders’ Equity
Common Stock
The Company had no preferred shares outstanding and had common shares outstanding for the three years ended
December 31, 2017
as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Balance, beginning of year
|
116,416,900
|
|
|
101,517,009
|
|
|
98,828,098
|
|
Issuance of common stock
|
8,395,607
|
|
|
14,063,100
|
|
|
2,493,171
|
|
Non-vested stock-based awards, net of withheld shares and forfeitures
|
319,086
|
|
|
836,791
|
|
|
195,740
|
|
Balance, end of year
|
125,131,593
|
|
|
116,416,900
|
|
|
101,517,009
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Equity Offering
On August 14, 2017, the Company issued
8,337,500
shares of common stock par value
$0.01
per share, at
$30.90
per share in an underwritten public offering pursuant to the Company's existing effective registration statement. The net proceeds of the offering, after underwriting discount and offering expenses, were approximately
$247.1 million
.
At-The-Market Equity Offering Program
The Company has in place an at-the-market equity offering program to sell shares of the Company’s common stock from time to time in at-the-market sales transactions. The following table details the shares sold under this program.
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Sold
|
|
|
Sales Price Per Share
|
|
Net Proceeds
(in millions)
|
|
2017
|
|
—
|
|
|
NA
|
|
$
|
—
|
|
2016
|
|
4,795,601
|
|
|
$28.31 - $33.66
|
|
$
|
144.6
|
|
2015
|
|
2,434,239
|
|
|
$25.00 - $29.15
|
|
$
|
65.8
|
|
On February 19, 2016, the Company entered into sales agreements with
five
investment banks to allow sales under its at-the-market equity offering program of up to
10,000,000
shares of common stock. A previous sales agreement with
one
investment bank was terminated effective February 17, 2016. No shares were sold related to this program during 2017. On May 5, 2017, the Company entered into a sales agreement with a sixth investment bank in connection with the same allotment of shares. The Company has
5,868,697
authorized shares remaining available to be sold under the current sales agreements as of
February 14, 2018
.
Dividends Declared
During
2017
, the Company declared and paid common stock dividends aggregating
$1.20
per share (
$0.30
per share per quarter).
On February 13, 2018, the Company declared a quarterly common stock dividend in the amount of
$0.30
per share payable on March 6, 2018 to stockholders of record on February 23, 2018.
Common Stock Authorization
On May 2, 2017, the Company's shareholders approved an amendment to the Company's Articles of Incorporation to increase the number of authorized shares of common stock from
150,000,000
to
300,000,000
.
Authorization to Repurchase Common Stock
The Company’s Board of Directors has authorized management to repurchase up to
3,000,000
shares of the Company’s common stock. As of
December 31, 2017
, the Company had not repurchased any shares under this authorization. The Company may elect, from time to time, to repurchase shares either when market conditions are appropriate or as a means to reinvest excess cash flows. Such purchases, if any, may be made either in the open market or through privately negotiated transactions.
Accumulated Other Comprehensive Income (Loss)
During the year ended December 31, 2017, the Company entered into
two
interest rate swaps to hedge the variable cash flows associated with existing variable-rate debt. The Company recorded a loss in accumulated other comprehensive loss of approximately
$0.1 million
as of December 31, 2017. The Company continues to amortize the 2015 settlement of forward-starting interest rate swaps. This amount will be reclassified out of accumulated other comprehensive loss impacting net income over the
10
-year term of the associated senior note issuance. See Note 10 for more information regarding the Company's derivative instruments.
The following table represents the changes in accumulated other comprehensive loss during the year ended
December 31, 2017
:
|
|
|
|
|
|
(Dollars in thousands)
|
|
Interest Rate Swaps
|
|
Beginning balance
|
|
$
|
(1,401
|
)
|
Other comprehensive loss before reclassifications
|
|
176
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
(74
|
)
|
Net current-period other comprehensive income
|
|
102
|
|
Ending balance
|
|
$
|
(1,299
|
)
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table represents the details regarding the reclassifications from Accumulated other comprehensive income (loss) during the year ended
December 31, 2017
:
|
|
|
|
|
|
|
|
Details about accumulated other comprehensive income (loss) components
|
|
Amount reclassified from accumulated other comprehensive income (loss)
|
|
|
Affected line item in the statement where net income is presented
|
(Dollars in thousands)
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive income (loss) related to settled interest rate swaps
|
|
$
|
169
|
|
|
Interest Expense
|
Amounts reclassified from accumulated other comprehensive income (loss) related to current interest rate swaps
|
|
7
|
|
|
Interest Expense
|
|
|
$
|
176
|
|
|
|
12. Benefit Plans
Executive Retirement Plan
Effective May 5, 2015, the Company terminated its Executive Retirement Plan and recorded a charge of approximately
$5.3 million
, inclusive of the acceleration of
$2.5 million
recorded in accumulated other comprehensive loss on the Company's Consolidated Balance Sheet that was being amortized resulting in a total benefit obligation of
$19.6 million
in connection with the termination of the Executive Retirement Plan. The charge includes amounts resulting from assumed additional years of service for
two
plan participants who had not reached age 65 and payments associated with FICA and other tax obligations.
On May 6, 2016, the Company paid the total benefit obligation of
$19.6 million
which reduced Other liabilities on the Company's Consolidated Balance Sheets. As a result of the termination of the plan, and included in the payment of the total benefit obligation, Mr. Emery received a lump sum amount equal to his accrued benefit under the plan of approximately
$14.4 million
in May 2016.
Net periodic benefit cost for the Executive Retirement Plan for the three years in the period ended
December 31, 2017
is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Dollars in thousands)
|
2017
|
|
|
2016
|
|
|
2015
|
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
29
|
|
Interest cost
|
—
|
|
|
—
|
|
|
225
|
|
Amortization of prior service cost (benefit)
|
—
|
|
|
—
|
|
|
(198
|
)
|
Amortization of net gain
|
—
|
|
|
—
|
|
|
343
|
|
|
—
|
|
|
—
|
|
|
399
|
|
Net loss recognized in Accumulated other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
Total recognized in net periodic benefit gain and Accumulated other comprehensive income
(1)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
399
|
|
_____
|
|
(1)
|
2015 is a partial year due to the termination of the Executive Retirement Plan during the year.
|
The Company had
no
benefit obligations as of
December 31, 2017
and
2016
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. Stock and Other Incentive Plans
Stock Incentive Plan
In May 2015, the Company's stockholders approved the 2015 Stock Incentive Plan (the "2015 Incentive Plan") which authorizes the Company to issue
3,500,000
shares of common stock to its employees and directors. The 2015 Incentive Plan, which superseded the 2007 Employee Stock Incentive Plan (the "Predecessor Plan"), will continue until terminated by the Company’s Board of Directors. As of
December 31, 2017
and
2016
, the Company had issued a total of
1,438,228
and
1,024,739
restricted shares, respectively, under the 2015 Incentive Plan for compensation-related awards to employees and directors, with a total of
2,061,772
and
2,475,261
, respectively, remaining which had not been issued. Under the Predecessor Plan for compensation-related awards to employees and directors, the Company had issued, net of forfeitures, a total of
1,878,637
restricted shares for the year ended December 31, 2015. Non-vested shares issued under the 2015 Incentive Plan are generally subject to fixed vesting periods varying from
three
to
eight
years beginning on the date of issue. If a recipient voluntarily terminates his or her relationship with the Company or is terminated for cause before the end of the vesting period, the shares are forfeited, at no cost to the Company. The Company recognizes the impact of forfeitures as they occur. Once the shares have been issued, the recipient has the right to receive dividends and the right to vote the shares. Compensation expense recognized during the years ended
December 31, 2017
,
2016
and
2015
from the amortization of the value of shares over the vesting period issued to employees and directors was
$9.8 million
,
$7.4 million
and
$5.9 million
, respectively. The following table represents expected amortization of the Company's non-vested shares issued:
|
|
|
|
|
(Dollars in millions)
|
Future Amortization of Non-Vested Shares
|
|
2018
|
$
|
9.4
|
|
2019
|
7.0
|
|
2020
|
6.7
|
|
2021
|
5.7
|
|
2022
|
3.2
|
|
2023 and thereafter
|
3.6
|
|
Total
|
$
|
35.6
|
|
Executive Incentive Plan
On July 31, 2012, the Company adopted an Executive Incentive Plan, which was amended and restated on February 16, 2016 ("Executive Incentive Plan"), to provide specific award criteria with respect to incentive awards made under the 2015 Incentive Plan subject to the discretion of the Compensation Committee. No new shares of common stock were authorized in connection with the Executive Incentive Plan. Under the terms of the Executive Incentive Plan, the Company's named executive officers, and certain other members of senior management, may earn incentive awards in the form of cash and non-vested stock. Cash incentive awards are based on individual and Company performance. Company performance is measured over a four-quarter period against targeted financial and operational metrics set in advance by the Compensation Committee. Non-vested stock awards are based on the Company's relative total shareholder return ("TSR") performance over
one
-year and
three
-year periods, measured against the Company's peer group. For
2017
,
2016
and
2015
, compensation expense resulting from the amortization of non-vested share grants to officers was approximately
$5.0 million
,
$4.0 million
, and
$2.7 million
, respectively. Details of the awards that have been earned from this plan are as follows:
|
|
•
|
On December 11, 2017, the Company granted non-vested stock awards for TSR performance to its
five
named executive officers and
four
senior vice presidents with a grant date fair value totaling
$10.1 million
, which were granted in the form of
309,874
non-vested shares, with a
five
-year vesting period, which will result in annual compensation expense of
$2.0 million
for the each of 2018, 2019, 2020, and 2021, and
$1.9 million
for 2022, respectively.
|
|
|
•
|
On December 16, 2016, the Company granted non-vested stock awards for TSR performance to its
five
named executive officers and
five
senior vice presidents with a grant date fair value totaling
$6.3 million
, which were granted in the form of
213,639
non-vested shares, with a
five
-year vesting period, which will result in annual compensation expense of
$1.3 million
each of 2018, 2019, and 2020, and
$1.2 million
for 2021, respectively.
|
|
|
•
|
On February 16, 2016, the Company granted cash incentive and non-vested performance-based awards totaling
$5.8 million
to its
five
named executive officers and
five
senior vice presidents. The officers could elect cash based awards or non-vested stock awards. Cash awards totaled
$1.1 million
. The non-vested awards, which the officers elected to
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
receive in lieu of cash, had a grant date fair value totaling
$4.7 million
, which were granted in the form of
163,788
non-vested shares, with either a
three
- or
five
-year vesting period, resulting in annual compensation expense of
$1.1 million
for the year 2018 and
$0.7 million
for each of 2019 and 2020, respectively.
|
|
•
|
On December 18, 2015, the Company granted non-vested stock awards for TSR performance to its
five
named executive officers and
five
senior vice presidents with a grant date fair value totaling
$3.9 million
. The awards were granted in the form of
139,000
non-vested shares, with a
three
-year vesting period, which will result in annual compensation expense of
$1.3 million
for 2018.
|
Long-Term Incentive Program
In the first quarter of
2017
and
2016
, the Company granted a performance-based award to officers, excluding the
five
named executive officers and
four
senior vice presidents, under the Long-term Incentive Program adopted under the 2015 Incentive Plan (the "LTIP") totaling approximately
$1.3 million
per award, which was granted in the form of
41,368
non-vested shares and
44,162
non-vested shares, respectively. The shares have vesting periods ranging from
three
to
eight
years with a weighted average vesting period of approximately
six
years. Beginning in 2012, the Company's executive officers were no longer eligible to participate in the LTIP and beginning in 2013,
five
senior vice presidents were also no longer eligible to participate.
For
2017
,
2016
and
2015
, compensation expense resulting from the amortization of non-vested share grants to officers was approximately
$1.1 million
.
Salary Deferral Plan
The Company's salary deferral plan allows certain of its officers to elect to defer up to
50%
of their base salary in the form of non-vested shares issued under the 2015 Incentive Plan subject to long-term vesting. The number of shares will be increased through a Company match depending on the length of the vesting period selected by the officer. The officer's vesting period choices are:
three years
for a
30%
match;
five years
for a
50%
match; and
eight years
for a
100%
match. During
2017
,
2016
and
2015
, the Company issued
39,016
shares,
42,256
shares and
55,923
shares, respectively, to its officers through the salary deferral plan. For
2017
,
2016
and
2015
, compensation expense resulting from the amortization of non-vested share grants to officers was approximately
$1.2 million
,
$1.2 million
, and
$1.1 million
, respectively.
Non-employee Directors Incentive Plan
The Company issues non-vested shares to its non-employee directors under the 2015 Incentive Plan. The directors’ shares issued have a
one
-year vesting period beginning with the May 2015 grant (previously a
three
-year vesting period) and are subject to forfeiture prior to such date upon termination of the director’s service, at no cost to the Company. During
2017
,
2016
and
2015
, the Company issued
23,231
shares,
21,374
shares, and
23,201
shares, respectively, to its non-employee directors through the 2015 Incentive Plan. For
2017
,
2016
and
2015
, compensation expense resulting from the amortization of non-vested share grants to directors was approximately
$0.8 million
,
$1.0 million
, and
$1.0 million
, respectively.
Other Grants
The Company issued
three
one-time non-vested share grants related to executive management transition in 2016. For
2017
and
2016
, compensation expense resulting from the amortization of these non-vested share grants to officers was approximately
$1.7 million
and
$0.1 million
, respectively. The following information provides information about each grant:
|
|
•
|
On March 1, 2016, the Company issued
50,000
shares to the Chief Financial Officer with a
10
-year vesting period, resulting in compensation expense of
$0.2 million
per year.
|
|
|
•
|
On December 30, 2016, the Company issued
200,000
shares to the President and Chief Executive Officer with a
10
-year vesting period, resulting in compensation expense of
$0.6 million
per year.
|
|
|
•
|
On December 30, 2016, the Company issued
150,000
shares to the Executive Chairman with a
5
-year vesting period, resulting in compensation expense of
$0.9 million
per year.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A summary of the activity under the 2015 Incentive Plan and related information for the three years in the period ended
December 31, 2017
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Dollars in thousands, except per share data)
|
2017
|
|
|
2016
|
|
|
2015
|
|
Stock-based awards, beginning of year
|
1,786,497
|
|
|
1,092,262
|
|
|
1,057,732
|
|
Granted
|
413,489
|
|
|
885,219
|
|
|
251,789
|
|
Vested
|
(292,341
|
)
|
|
(190,984
|
)
|
|
(210,955
|
)
|
Forfeited
|
—
|
|
|
—
|
|
|
(6,304
|
)
|
Stock-based awards, end of year
|
1,907,645
|
|
|
1,786,497
|
|
|
1,092,262
|
|
Weighted-average grant date fair value of:
|
|
|
|
|
|
Stock-based awards, beginning of year
|
$
|
27.18
|
|
|
$
|
24.72
|
|
|
$
|
24.01
|
|
Stock-based awards granted during the year
|
$
|
32.05
|
|
|
$
|
29.60
|
|
|
$
|
27.70
|
|
Stock-based awards vested during the year
|
$
|
25.88
|
|
|
$
|
24.34
|
|
|
$
|
25.05
|
|
Stock-based awards forfeited during the year
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24.80
|
|
Stock-based awards, end of year
|
$
|
28.44
|
|
|
$
|
27.18
|
|
|
$
|
24.72
|
|
Grant date fair value of shares granted during the year
|
$
|
13,254
|
|
|
$
|
26,204
|
|
|
$
|
6,975
|
|
The vesting periods for the non-vested shares granted during
2017
ranged from
one
to
eight
years with a weighted-average amortization period remaining as of
December 31, 2017
of approximately
5.1
years.
During
2017
,
2016
and
2015
, the Company withheld
94,403
shares,
48,248
shares and
49,225
shares, respectively, of common stock from its officers to pay estimated withholding taxes related to the vesting of shares.
401(k) Plan
The Company maintains a 401(k) plan that allows eligible employees to defer salary, subject to certain limitations imposed by the Internal Revenue Code. The Company provides a matching contribution of up to
3%
of each eligible employee’s salary, subject to certain limitations. The Company’s matching contributions were approximately
$0.4 million
for each year during
2017
,
2016
and
2015
.
Dividend Reinvestment Plan
The Company is authorized to issue
1,000,000
shares of common stock to stockholders under the Dividend Reinvestment Plan. As of
December 31, 2017
, the Company had issued
581,627
shares under the plan of which
26,031
shares were issued in
2017
,
9,575
shares were issued in
2016
and
13,950
shares were issued in
2015
.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan, pursuant to which the Company is authorized to issue shares of common stock. As of
December 31, 2017
,
2016
and
2015
, the Company had a total of
25,535
shares,
63,690
shares and
96,977
shares authorized under the Employee Stock Purchase Plan, respectively, which had not been issued or optioned. Under the Employee Stock Purchase Plan, each eligible employee in January of each year is able to purchase up to
$25,000
of common stock at the lesser of
85%
of the market price on the date of grant or
85%
of the market price on the date of exercise of such option. The number of shares subject to each year’s option becomes fixed on the date of grant. Options granted under the Employee Stock Purchase Plan expire if not exercised
27 months
after each such option’s date of grant. Cash received from employees upon exercising options under the Employee Stock Purchase Plan was approximately
$0.8 million
for the year ended
December 31, 2017
,
$1.2 million
for the year ended
December 31, 2016
, and
$0.9 million
for the year ended
December 31, 2015
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A summary of the Employee Stock Purchase Plan activity and related information for the three years in the period ended
December 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Dollars in thousands, except per share data)
|
2017
|
|
|
2016
|
|
|
2015
|
|
Options outstanding, beginning of year
|
316,321
|
|
|
340,958
|
|
|
393,902
|
|
Granted
|
206,824
|
|
|
198,450
|
|
|
197,640
|
|
Exercised
|
(32,076
|
)
|
|
(57,924
|
)
|
|
(44,462
|
)
|
Forfeited
|
(40,659
|
)
|
|
(22,081
|
)
|
|
(47,176
|
)
|
Expired
|
(132,310
|
)
|
|
(143,082
|
)
|
|
(158,946
|
)
|
Options outstanding and exercisable, end of year
|
318,100
|
|
|
316,321
|
|
|
340,958
|
|
Weighted-average exercise price of:
|
|
|
|
|
|
Options outstanding, beginning of year
|
$
|
23.69
|
|
|
$
|
20.70
|
|
|
$
|
19.17
|
|
Options granted during the year
|
$
|
25.77
|
|
|
$
|
24.07
|
|
|
$
|
23.22
|
|
Options exercised during the year
|
$
|
24.31
|
|
|
$
|
21.40
|
|
|
$
|
19.41
|
|
Options forfeited during the year
|
$
|
25.01
|
|
|
$
|
23.16
|
|
|
$
|
19.90
|
|
Options expired during the year
|
$
|
23.22
|
|
|
$
|
18.11
|
|
|
$
|
20.41
|
|
Options outstanding, end of year
|
$
|
25.00
|
|
|
$
|
23.69
|
|
|
$
|
20.70
|
|
Weighted-average fair value of options granted during the year (calculated as of the grant date)
|
$
|
6.31
|
|
|
$
|
5.37
|
|
|
$
|
5.39
|
|
Intrinsic value of options exercised during the year
|
$
|
271
|
|
|
$
|
634
|
|
|
$
|
381
|
|
Intrinsic value of options outstanding and exercisable (calculated as of December 31)
|
$
|
2,683
|
|
|
$
|
2,098
|
|
|
$
|
2,597
|
|
Exercise prices of options outstanding (calculated as of December 31)
|
$
|
25.00
|
|
|
$
|
23.69
|
|
|
$
|
20.70
|
|
Weighted-average contractual life of outstanding options (calculated as of December 31, in years)
|
0.8
|
|
|
0.8
|
|
|
0.8
|
|
The fair values for these options were estimated at the date of grant using a Black-Scholes options pricing model with the weighted-average assumptions for the options granted during the period noted in the following table. The risk-free interest rate was based on the U.S. Treasury constant maturity-nominal two-year rate whose maturity is nearest to the date of the expiration of the latest option outstanding and exercisable; the expected dividend yield was based on the expected dividends of the current year as a percentage of the average stock price of the prior year; the expected life of each option was estimated using the historical exercise behavior of employees; expected volatility was based on historical volatility of the Company’s common stock; and expected forfeitures were based on historical forfeiture rates within the look-back period.
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Risk-free interest rates
|
1.20
|
%
|
|
1.06
|
%
|
|
0.67
|
%
|
Expected dividend yields
|
3.70
|
%
|
|
4.64
|
%
|
|
4.79
|
%
|
Expected life (in years)
|
1.45
|
|
|
1.42
|
|
|
1.38
|
|
Expected volatility
|
20.4
|
%
|
|
17.6
|
%
|
|
21.0
|
%
|
Expected forfeiture rates
|
85
|
%
|
|
85
|
%
|
|
80
|
%
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
14. Earnings Per Share
The Company uses the two-class method of computing net earnings per common shares. Non-vested share-based awards containing non-forfeitable rights to dividends are considered participating securities pursuant to the two-class method. The table below sets forth the computation of basic and diluted earnings per common share for the three years in the period ended
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Dollars in thousands, except per share data)
|
2017
|
|
|
2016
|
|
|
2015
|
|
Weighted Average Common Shares
|
|
|
|
|
|
Weighted average Common Shares outstanding
|
119,739,216
|
|
|
109,861,580
|
|
|
100,280,059
|
|
Non-vested shares
|
(1,813,058
|
)
|
|
(1,289,478
|
)
|
|
(1,108,707
|
)
|
Weighted average Common Shares - Basic
|
117,926,158
|
|
|
108,572,102
|
|
|
99,171,352
|
|
Weighted average Common Shares - Basic
|
117,926,158
|
|
|
108,572,102
|
|
|
99,171,352
|
|
Dilutive effect of non-vested shares
|
—
|
|
|
709,559
|
|
|
623,212
|
|
Dilutive effect of employee stock purchase plan
|
91,007
|
|
|
105,336
|
|
|
85,738
|
|
Weighted average Common Shares - Diluted
|
118,017,165
|
|
|
109,386,997
|
|
|
99,880,302
|
|
Net Income
|
|
|
|
|
|
Income from continuing operations
|
$
|
23,096
|
|
|
$
|
85,756
|
|
|
$
|
58,836
|
|
Dividends paid on nonvested share-based awards
|
(2,149
|
)
|
|
—
|
|
|
—
|
|
Income from continuing operations applicable to common stockholders
|
20,947
|
|
|
85,756
|
|
|
58,836
|
|
Discontinued operations
|
(4
|
)
|
|
(185
|
)
|
|
10,600
|
|
Net income applicable to common stockholders
|
$
|
20,943
|
|
|
$
|
85,571
|
|
|
$
|
69,436
|
|
Basic Earnings Per Common Share
|
|
|
|
|
|
Income from continuing operations
|
$
|
0.18
|
|
|
$
|
0.79
|
|
|
$
|
0.59
|
|
Income from discontinued operations
|
0.00
|
|
|
0.00
|
|
|
0.11
|
|
Net income
|
$
|
0.18
|
|
|
$
|
0.79
|
|
|
$
|
0.70
|
|
Diluted Earnings Per Common Share
|
|
|
|
|
|
Income from continuing operations
|
$
|
0.18
|
|
|
$
|
0.78
|
|
|
$
|
0.59
|
|
Income from discontinued operations
|
0.00
|
|
|
0.00
|
|
|
0.11
|
|
Net income
|
$
|
0.18
|
|
|
$
|
0.78
|
|
|
$
|
0.70
|
|
15. Commitments and Contingencies
Redevelopment Activity
The Company completed the redevelopment and expansion of
one
medical office building in Nashville, Tennessee in 2017. The Company spent approximately
$12.6 million
on the redevelopment of this property during the year ended
December 31, 2017
, including approximately
$3.2 million
related to overages on tenant improvement projects that have been or will be reimbursed by the tenant.
During 2017, the Company began the redevelopment of a medical office building in Charlotte, North Carolina, which includes a
38,000
square foot vertical expansion. The Company spent approximately
$3.3 million
on the redevelopment during the year ended December 31, 2017.
Development Activity
The Company completed the development of a
99,957
square foot medical office building in Denver, Colorado. The Company spent approximately
$14.6 million
during the year ended
December 31, 2017
, including approximately
$2.8 million
related to overages on tenant improvement projects that have been or will be reimbursed by the tenant. The Company anticipates funding additional tenant improvements throughout 2018 and 2019.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company began the development of a
151,000
square foot medical office building in Seattle, Washington during 2017. The Company spent approximately
$1.8 million
on the development during the year ended December 31, 2017. The Company expects the project to be completed in the second quarter of 2019.
The table below details the Company’s construction activity as of
December 31, 2017
. The information included in the table below represents management’s estimates and expectations at
December 31, 2017
, which are subject to change. The Company’s disclosures regarding certain projections or estimates of completion dates may not reflect actual results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Number of Properties
|
|
Estimated Completion Date
|
|
Construction in Progress Balance
|
|
|
Total Funded During the Year
|
|
|
Total Amount Funded
|
|
|
Estimated Remaining Fundings (unaudited)
|
|
|
Estimated Total Investment (unaudited)
|
|
|
Approximate Square Feet (unaudited)
|
|
Construction Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charlotte, NC
|
|
1
|
|
Q1 2019
|
|
$
|
3,487
|
|
|
$
|
3,264
|
|
|
$
|
3,487
|
|
|
8,513
|
|
|
$
|
12,000
|
|
|
204,000
|
|
Seattle, WA
|
|
1
|
|
Q2 2019
|
|
1,971
|
|
|
1,809
|
|
|
2,272
|
|
|
61,848
|
|
|
64,120
|
|
|
151,000
|
|
Total
|
|
|
|
|
|
$
|
5,458
|
|
|
$
|
5,073
|
|
|
$
|
5,759
|
|
|
$
|
70,361
|
|
|
$
|
76,120
|
|
|
355,000
|
|
Tenant Improvements
The Company may provide a tenant improvement allowance in new or renewal leases for the purpose of refurbishing or renovating tenant space. As of
December 31, 2017
, the Company had commitments of approximately
$27.8 million
that is expected to be spent on tenant improvements throughout the portfolio, excluding development properties currently under construction.
Land Held for Development
Land held for development includes parcels of land owned by the Company, upon which the Company intends to develop and own outpatient healthcare facilities. The Company’s investment in
six
parcels of land held for development located adjacent to certain of the Company's existing medical office buildings in Texas, Iowa and Tennessee totaled approximately
$20.1 million
as of
December 31, 2017
and
2016
.
Operating Leases
As of
December 31, 2017
, the Company was obligated under operating lease agreements consisting primarily of the Company’s corporate office lease and ground leases. At
December 31, 2017
, the Company had
109
properties totaling
8.9 million
square feet that were held under ground leases with a remaining weighted average term of
68.7
years, including renewal options. These ground leases typically have initial terms of
50
to
75
years with
one
to
two
renewal options extending the terms to
75
to
100
years, with expiration dates through
2117
.
The Company’s ground leases generally increase annually based on increases in the Consumer Price Index. Rental expense relating to the operating leases for the years ended
December 31, 2017
,
2016
and
2015
was
$6.3 million
,
$5.7 million
and
$5.1 million
, respectively. The Company prepaid
48
ground leases, which represented approximately
$0.5 million
of the Company’s rental expense for the years ended
December 31, 2017
,
2016
, and
2015
.
The Company’s corporate office lease currently covers approximately
36,653
square feet of rented space and expires on October 31, 2020. The Company’s future minimum lease payments for its corporate office lease and
61
ground leases, excluding leases that the Company has prepaid and leases in which an operator pays or fully reimburses the Company, as of
December 31, 2017
were as follows (in thousands):
|
|
|
|
|
2018
|
$
|
5,341
|
|
2019
|
5,420
|
|
2020
|
5,459
|
|
2021
|
5,488
|
|
2022
|
5,516
|
|
2023 and thereafter
|
283,056
|
|
|
$
|
310,280
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
16. Other Data
Taxable Income (unaudited)
The Company has elected to be taxed as a REIT, as defined under the Internal Revenue Code. To qualify as a REIT, the
Company must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its taxable income to its stockholders.
As a REIT, the Company generally will not be subject to federal income tax on taxable income it distributes currently to its stockholders. Accordingly, no provision for federal income taxes has been made in the accompanying Consolidated Financial Statements. If the Company fails to qualify as a REIT for any taxable year, then it will be subject to federal income taxes at regular corporate rates, including any applicable alternative minimum tax, and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies as a REIT, it may be subject to certain state and local taxes on its income and property and to federal income and excise tax on its undistributed taxable income.
Earnings and profits (as defined under the Internal Revenue Code), the current and accumulated amounts of which determine the taxability of distributions to stockholders, vary from net income attributable to common stockholders and taxable income because of different depreciation recovery periods, depreciation methods, and other items.
On a tax-basis, the Company’s gross real estate assets totaled approximately
$4.0 billion
,
$3.7 billion
, and
$3.4 billion
as of
December 31, 2017
, 2016 and 2015, respectively.
The following table reconciles the Company’s consolidated net income attributable to common stockholders to taxable income for the three years ended
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Dollars in thousands)
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net income
|
$
|
23,092
|
|
|
$
|
85,571
|
|
|
$
|
69,436
|
|
Reconciling items to taxable income:
|
|
|
|
|
|
Depreciation and amortization
|
46,426
|
|
|
38,260
|
|
|
30,457
|
|
Gain or loss on disposition of depreciable assets
|
1,570
|
|
|
(32,103
|
)
|
|
1,659
|
|
Impairments
|
—
|
|
|
121
|
|
|
687
|
|
Straight-line rent
|
(4,551
|
)
|
|
(7,101
|
)
|
|
(8,833
|
)
|
Receivable allowances
|
1,680
|
|
|
2,067
|
|
|
571
|
|
Stock-based compensation
|
1,855
|
|
|
1,301
|
|
|
7,518
|
|
Other
|
6,552
|
|
|
2,236
|
|
|
4,304
|
|
|
53,532
|
|
|
4,781
|
|
|
36,363
|
|
Taxable income
(1)
|
$
|
76,624
|
|
|
$
|
90,352
|
|
|
$
|
105,799
|
|
Dividends paid
|
$
|
142,327
|
|
|
$
|
131,759
|
|
|
$
|
120,266
|
|
______
(1) Before REIT dividend paid deduction.
Characterization of Distributions (unaudited)
Distributions in excess of earnings and profits generally constitute a return of capital. The following table gives the characterization of the distributions on the Company’s common stock for the three years ended
December 31, 2017
.
For the three years ended
December 31, 2017
, there were
no
preferred shares outstanding. As such,
no
dividends were distributed related to preferred shares for those periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Per Share
|
|
|
%
|
|
|
Per Share
|
|
|
%
|
|
|
Per Share
|
|
|
%
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary income
|
$
|
0.42
|
|
|
34.5
|
%
|
|
$
|
0.78
|
|
|
65.0
|
%
|
|
$
|
0.61
|
|
|
51.0
|
%
|
Return of capital
|
0.50
|
|
|
42.0
|
%
|
|
0.35
|
|
|
29.5
|
%
|
|
0.08
|
|
|
6.7
|
%
|
Unrecaptured section 1250 gain
|
0.28
|
|
|
23.5
|
%
|
|
0.07
|
|
|
5.5
|
%
|
|
0.51
|
|
|
42.3
|
%
|
Common stock distributions
|
$
|
1.20
|
|
|
100.0
|
%
|
|
$
|
1.20
|
|
|
100.0
|
%
|
|
$
|
1.20
|
|
|
100.0
|
%
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
State Income Taxes
The Company must pay certain state income taxes, which are included in general and administrative expense on the Company’s Consolidated Statements of Income.
The State of Texas gross margins tax on gross receipts from operations is disclosed in the table below as an income tax because it is considered such by the Securities and Exchange Commission.
State income tax expense and state income tax payments for the three years ended
December 31, 2017
are detailed in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Dollars in thousands)
|
2017
|
|
|
2016
|
|
|
2015
|
|
State income tax expense:
|
|
|
|
|
|
Texas gross margins tax
(1)
|
$
|
608
|
|
|
$
|
562
|
|
|
$
|
528
|
|
Other
|
—
|
|
|
2
|
|
|
37
|
|
Total state income tax expense
|
$
|
608
|
|
|
$
|
564
|
|
|
$
|
565
|
|
State income tax payments, net of refunds and collections
|
$
|
555
|
|
|
$
|
544
|
|
|
$
|
758
|
|
______
|
|
(1)
|
In the table above, income tax expense for 2015 includes approximately
$50 thousand
that was recorded to the gain on sale of real estate properties sold, which is included in discontinued operations rather than general and administrative expenses on the Company’s Consolidated Statements of Income.
|
17. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practical to estimate that value.
Cash, cash equivalents and restricted cash -
The carrying amount approximates fair value.
Mortgage notes receivable -
The fair value of mortgage notes receivable is estimated based either on cash flow analyses at an assumed market rate of interest or at a rate consistent with the rates on mortgage notes acquired by the Company recently, if any.
Borrowings under the Unsecured Credit Facility due 2020 and Unsecured Term Loan due 2022 -
The carrying amount approximates fair value because the borrowings are based on variable market interest rates.
Senior unsecured notes payable -
The fair value of notes and bonds payable is estimated using cash flow analyses, based on the Company’s current interest rates for similar types of borrowing arrangements.
Mortgage notes payable -
The fair value is estimated using cash flow analyses, based on the Company’s current interest rates for similar types of borrowing arrangements.
Interest rate swap agreements -
Interest rate swap agreements are recorded in other liabilities on the Company's Consolidated Balance Sheets at fair value. Fair value is estimated by utilizing pricing models that consider forward yield curves and discount rates.
The table below details the fair value and carrying values for notes and bonds payable as of
December 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
(Dollars in millions)
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
Notes and bonds payable
(1)
|
$
|
1,283.9
|
|
|
$
|
1,269.7
|
|
|
$
|
1,264.4
|
|
|
$
|
1,265.1
|
|
______
(1) Level 2 – model-derived valuations in which significant inputs and significant value drivers are observable in active markets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
18. Selected Quarterly Financial Data (unaudited)
Quarterly financial information for the year ended
December 31, 2017
is summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
(Dollars in thousands, except per share data)
|
March 31
(1)
|
|
|
June 30
(2)
|
|
|
September 30
(3)
|
|
|
December 31
(4)
|
|
2017
|
|
|
|
|
|
|
|
Revenues from continuing operations
|
$
|
104,569
|
|
|
$
|
105,245
|
|
|
$
|
106,953
|
|
|
$
|
107,731
|
|
Income (loss) from continuing operations
|
31,858
|
|
|
25,224
|
|
|
3,165
|
|
|
(37,151
|
)
|
Income (loss) from discontinued operations
|
(13
|
)
|
|
—
|
|
|
8
|
|
|
—
|
|
Net income (loss) attributable to common stockholders
|
$
|
31,845
|
|
|
$
|
25,224
|
|
|
$
|
3,173
|
|
|
$
|
(37,151
|
)
|
Net income attributable to common stockholders per share:
|
|
|
|
|
|
|
|
Basic earnings per common share
|
$
|
0.28
|
|
|
$
|
0.22
|
|
|
$
|
0.02
|
|
|
$
|
(0.31
|
)
|
Diluted earnings per common share
|
$
|
0.28
|
|
|
$
|
0.22
|
|
|
$
|
0.02
|
|
|
$
|
(0.31
|
)
|
______
|
|
(1)
|
The increases in net income and amounts per share for the first quarter of 2017 are primarily attributable to gains of
$23.4 million
on the sale of
six
properties.
|
|
|
(2)
|
The increases in net income and amounts per share for the second quarter of 2017 are primarily attributable to gains of
$16.1 million
on the sale of
three
properties.
|
|
|
(3)
|
The decreases in net income and amounts per share for the third quarter of
2017
are primarily attributable to impairment charges of
$5.1 million
.
|
|
|
(4)
|
The decreases in net income and amounts per share for the fourth quarter of 2017 are primarily attributable to a loss on the extinguishment of debt of
$45.0 million
.
|
Quarterly financial information for the year ended
December 31, 2016
is summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
(Dollars in thousands, except per share data)
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
(1)
|
|
2016
|
|
|
|
|
|
|
|
Revenues from continuing operations
|
$
|
100,021
|
|
|
$
|
102,642
|
|
|
$
|
103,659
|
|
|
$
|
105,309
|
|
Income from continuing operations
|
9,163
|
|
|
12,157
|
|
|
11,857
|
|
|
52,580
|
|
Loss from discontinued operations
|
(7
|
)
|
|
(12
|
)
|
|
(23
|
)
|
|
(143
|
)
|
Net income attributable to common stockholders
|
$
|
9,156
|
|
|
$
|
12,145
|
|
|
$
|
11,834
|
|
|
$
|
52,437
|
|
Net income attributable to common stockholders per share:
|
|
|
|
|
|
|
|
Basic earnings per common share
|
$
|
0.09
|
|
|
$
|
0.12
|
|
|
$
|
0.10
|
|
|
$
|
0.46
|
|
Diluted earnings per common share
|
$
|
0.09
|
|
|
$
|
0.12
|
|
|
$
|
0.10
|
|
|
$
|
0.45
|
|
______
|
|
(1)
|
The increases in net income and amounts per share for the fourth quarter of
2016
are primarily attributable to gains of
$41.0 million
on the sale of
six
properties.
|