UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2022

or

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

For the transition period from             to

Commission file number: 001-36007

PHYSICIANS REALTY TRUST

(Exact Name of Registrant as Specified in its Charter)

Maryland		46-2519850
(State of Organization)		(IRS Employer Identification No.)
309 N. Water Street, Suite 500		53202
Milwaukee,	Wisconsin
(Address of Principal Executive Offices)		(Zip Code)

(414) 367-5600

(Registrant’s Telephone Number, Including Area Code) 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
Common stock, $0.01 par value per share	DOC	New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).              Yes ☒ No ☐        

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒     Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ☐ No ☒        

The number of Physicians Realty Trust’s common shares outstanding as of October 26, 2022 was 228,260,860.

PHYSICIANS REALTY TRUST

Quarterly Report on Form 10-Q

for the Quarter Ended September 30, 2022

Table of Contents

		Page Number
Part I	Financial Information
Item 1	Financial Statements (Unaudited)
	Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021	3
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2022 and 2021	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2022 and 2021	5
	Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2022 and 2021	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021	8
	Notes to Consolidated Financial Statements	9
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4	Controls and Procedures	37
Part II	Other Information
Item 1	Legal Proceedings	39
Item 1A	Risk Factors	39
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 6	Exhibits	40
SIGNATURES		41

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts may be forward-looking statements within the meaning of the federal securities laws. In particular, statements pertaining to our capital resources, property performance, and results of operations contain forward-looking statements. Likewise, all of our statements regarding anticipated growth in our funds from operations and anticipated market conditions, demographics, and results of operations are forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as “believe,” “expect,” “outlook,” “continue,” “project,” “may,” “will,” “should,” “seek,” “approximately,” “intend,” “plan,” “pro forma,” “estimate,” or “anticipate” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans, expectations, or intentions.

These forward-looking statements reflect the views of our management regarding current expectations and projections about future events and are based on currently available information. These forward-looking statements are not guarantees of future performance and involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data, or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

•the unknown duration and economic, operational, and financial impacts of the global outbreak of a novel strain of the coronavirus and any variants that have emerged or that may emerge in the future, (the “COVID-19 pandemic”) and the actions taken by governmental authorities or others in connection with the COVID-19 pandemic will have on the Company’s business;

•general economic conditions, including inflation and recession;

•adverse economic or real estate developments, either nationally or in the markets where our properties are located;

•our failure to generate sufficient cash flows to service our indebtedness or to pay down or refinance our indebtedness;

•fluctuations and increases in interest rates and operating costs;

•the availability, terms, and deployment of debt and equity capital, including our unsecured revolving credit facility;

•our ability to make distributions on our common shares;

•general volatility of the market price of our common shares;

•our increased vulnerability economically due to the concentration of our investments in health care properties;

•our geographic concentration in Texas causes us to be particularly exposed to downturns in the Texas economy or other changes in Texas market conditions;

•changes in our business or strategy;

•our dependence upon key personnel whose continued service is not guaranteed;

•our ability to identify, hire, and retain highly qualified personnel in the future;

•the degree and nature of our competition;

•changes in governmental regulations or interpretations thereof, such as real estate and zoning laws and increases in real property tax rates, taxation of real estate investment trusts (“REITs”), and similar matters;

•defaults on or non-renewal of leases by tenants;

•decreased rental rates or increased vacancy rates;

1

•difficulties in identifying health care properties to acquire and completing acquisitions;

•competition for investment opportunities;

•any adverse effects to the business, financial position or results of operations of CommonSpirit Health, or one or more of the CommonSpirit Health-affiliated tenants, that impact the ability of CommonSpirit Health-affiliated tenants to pay us rent;

•the impact of our investments in joint ventures we have made and may make in the future;

•the financial condition and liquidity of, or disputes with, any joint venture and development partners with whom we may make co-investments in the future;

•the disruption of our business and the compromise of confidential information resulting from cybersecurity attacks, breaches, and other incidents;

•our ability to operate as a public company;

•changes in health care laws or government reimbursement rates;

•changes in accounting principles generally accepted in the United States (“GAAP”);

•lack of or insufficient amounts of insurance;

•the potential impact of severe weather events and climate change;

•other factors affecting the real estate industry generally;

•our failure to maintain our qualification as a REIT for U.S. federal income tax purposes;

•limitations imposed on our business and our ability to satisfy complex rules in order for us to qualify as a REIT for U.S. federal income tax purposes; and

•other factors that may materially adversely affect us, or the per share trading price of our common shares, including:

•the number of our common shares available for future issuance or sale;

•our issuance of equity securities or the perception that such issuance might occur;

•future debt;

•failure of securities analysts to publish research or reports about us or our industry; and

•securities analysts’ downgrade of our common shares or the health care-related real estate sector.

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events, or other changes after the date of this report, except as required by applicable law. You should not place undue reliance on any forward-looking statements that are based on information currently available to us or the third parties making the forward-looking statements. For a further discussion of these and other factors that could impact our future results, performance or transactions, see Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the Securities and Exchange Commission (the “Commission”) on February 24, 2022 (the “2021 Annual Report”).

As used in this report, unless the context otherwise requires, references to “we,” “us,” “our,” and the “Company” refer to Physicians Realty Trust (the “Trust”), a Maryland real estate investment trust, and Physicians Realty L.P. (the “Operating Partnership”), a Delaware limited partnership and the consolidated subsidiary of the Trust through which we conduct our business.

2

PART I.                         Financial Information

Item 1.                             Financial Statements

Physicians Realty Trust

Consolidated Balance Sheets

(In thousands, except share and per share data)

	September 30, 2022		December 31, 2021
	(unaudited)
ASSETS
Investment properties:
Land and improvements	$	241,385	$	235,453
Building and improvements	4,666,085		4,612,561
Tenant improvements	90,318		86,018
Acquired lease intangibles	505,335		498,221
	5,503,123		5,432,253
Accumulated depreciation	(948,883)		(821,036)
Net real estate property	4,554,240		4,611,217
Real estate held for sale	—		1,964
Right-of-use lease assets, net	232,320		235,483
Real estate loans receivable, net	120,576		117,844
Investments in unconsolidated entities	79,613		69,793
Net real estate investments	4,986,749		5,036,301
Cash and cash equivalents	2,512		9,876
Tenant receivables, net	9,644		4,948
Other assets	143,569		131,584
Total assets	$	5,142,474	$	5,182,709
LIABILITIES AND EQUITY
Liabilities:
Credit facility	$	256,893	$	267,641
Notes payable	1,465,078		1,464,008
Mortgage debt	164,556		180,269
Accounts payable	6,526		6,651
Dividends and distributions payable	58,382		57,246
Accrued expenses and other liabilities	92,494		86,254
Lease liabilities	104,905		104,957
Acquired lease intangibles, net	24,970		21,569
Total liabilities	2,173,804		2,188,595
Redeemable noncontrolling interests - partially owned properties	3,288		7,081
Equity:
Common shares, $0.01 par value, 500,000,000 common shares authorized, 226,763,146 and 224,678,116 common shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively	2,268		2,247
Additional paid-in capital	3,648,983		3,610,954
Accumulated deficit	(838,729)		(776,001)
Accumulated other comprehensive income (loss)	5,323		(892)
Total shareholders’ equity	2,817,845		2,836,308
Noncontrolling interests:
Operating Partnership	146,426		150,241
Partially owned properties	1,111		484
Total noncontrolling interests	147,537		150,725
Total equity	2,965,382		2,987,033
Total liabilities and equity	$	5,142,474	$	5,182,709

The accompanying notes are an integral part of these consolidated financial statements.

3

Physicians Realty Trust

Consolidated Statements of Income

(In thousands, except share and per share data) (Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenues:
Rental and related revenues	$	127,381	$	110,314	$	381,785	$	326,017
Interest income on real estate loans and other	4,132		4,997		12,285		15,558
Total revenues	131,513		115,311		394,070		341,575
Expenses:
Interest expense	18,299		13,498		52,356		40,754
General and administrative	10,079		9,534		30,400		28,116
Operating expenses	43,647		35,679		128,080		103,069
Depreciation and amortization	47,040		38,582		142,002		114,663
Impairment loss	—		340		—		340
Total expenses	119,065		97,633		352,838		286,942
Income before equity in loss of unconsolidated entities and gain on sale of investment properties, net:	12,448		17,678		41,232		54,633
Equity in loss of unconsolidated entities	(62)		(390)		(452)		(1,213)
Gain on sale of investment properties, net	53,894		4,757		57,375		5,111
Net income	66,280		22,045		98,155		58,531
Net income attributable to noncontrolling interests:
Operating Partnership	(3,252)		(529)		(4,830)		(1,405)
Partially owned properties (1)	(70)		(152)		(384)		(455)
Net income attributable to controlling interest	62,958		21,364		92,941		56,671
Preferred distributions	—		—		—		(13)
Net income attributable to common shareholders	$	62,958	$	21,364	$	92,941	$	56,658
Net income per share:
Basic	$	0.28	$	0.10	$	0.41	$	0.26
Diluted	$	0.28	$	0.10	$	0.41	$	0.26
Weighted average common shares:
Basic	226,529,041		217,406,657		225,743,856		214,616,482
Diluted	239,898,462		223,992,049		239,145,383		221,399,649
Dividends and distributions declared per common share	$	0.23	$	0.23	$	0.69	$	0.69

(1)Includes amounts attributable to redeemable noncontrolling interests.

The accompanying notes are an integral part of these consolidated financial statements.

4

Physicians Realty Trust

Consolidated Statements of Comprehensive Income

(In thousands) (Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net income	$	66,280	$	22,045	$	98,155	$	58,531
Other comprehensive income:
Change in fair value of interest rate swap agreements, net	1,753		465		6,215		1,805
Total other comprehensive income	1,753		465		6,215		1,805
Comprehensive income	68,033		22,510		104,370		60,336
Comprehensive income attributable to noncontrolling interests - Operating Partnership	(3,336)		(541)		(5,137)		(1,449)
Comprehensive income attributable to noncontrolling interests - partially owned properties	(70)		(152)		(384)		(455)
Comprehensive income attributable to common shareholders	$	64,627	$	21,817	$	98,849	$	58,432

The accompanying notes are an integral part of these consolidated financial statements.

5

Physicians Realty Trust

Consolidated Statements of Equity

(In thousands) (Unaudited)

	Par Value		Additional Paid in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’  Equity		Operating Partnership Noncontrolling Interest		Partially Owned Properties  Noncontrolling Interest		Total Noncontrolling Interests		Total Equity
Balance at December 31, 2021	$	2,247	$	3,610,954	$	(776,001)	$	(892)	$	2,836,308	$	150,241	$	484	$	150,725	$	2,987,033
Net proceeds from sale of common shares	3		5,029		—		—		5,032		—		—		—		5,032
Restricted share award grants, net	3		118		(421)		—		(300)		—		—		—		(300)
Purchase of OP Units	—		—		—		—		—		(184)		—		(184)		(184)
Dividends/distributions declared	—		—		(51,879)		—		(51,879)		(2,740)		—		(2,740)		(54,619)
Contributions	—		—		—		—		—		—		569		569		569
Distributions	—		—		—		—		—		—		(55)		(55)		(55)
Change in market value of Redeemable Noncontrolling Interest in partially owned properties	—		—		717		—		717		—		—		—		717
Change in fair value of interest rate swap agreement	—		—		—		1,379		1,379		—		—		—		1,379
Adjustment for Noncontrolling Interests ownership in Operating Partnership	—		(217)		—		—		(217)		217		—		217		—
Net income	—		—		13,092		—		13,092		692		82		774		13,866
Balance as of March 31, 2022	$	2,253	$	3,615,884	$	(814,492)	$	487	$	2,804,132	$	148,226	$	1,080	$	149,306	$	2,953,438
Net proceeds from sale of common shares	9		18,475		—		—		18,484		—		—		—		18,484
Restricted share award grants, net	1		3,588		(911)		—		2,678		—		—		—		2,678
Dividends/distributions declared	—		—		(52,116)		—		(52,116)		(2,712)		—		(2,712)		(54,828)
Distributions	—		—		—		—		—		—		(61)		(61)		(61)
Change in market value of Redeemable Noncontrolling Interest in partially owned properties	—		—		527		—		527		—		—		—		527
Change in fair value of interest rate swap agreement	—		—		—		3,083		3,083		—		—		—		3,083
Adjustment for Noncontrolling Interests ownership in Operating Partnership	—		(488)		—		—		(488)		488		—		488		—
Net income	—		—		16,891		—		16,891		886		79		965		17,856
Balance as of June 30, 2022	$	2,263	$	3,637,459	$	(850,101)	$	3,570	$	2,793,191	$	146,888	$	1,098	$	147,986	$	2,941,177
Net proceeds from sale of common shares	5		7,925		—		—		7,930		—		—		—		7,930
Restricted share award grants, net	—		4,326		(536)		—		3,790		—		—		—		3,790
Purchase of OP Units	—		—		—		—		—		(2,139)		—		(2,139)		(2,139)
Dividends/distributions declared	—		—		(52,563)		—		(52,563)		(2,302)		—		(2,302)		(54,865)
Distributions	—		—		—		—		—		—		(61)		(61)		(61)
Change in market value of Redeemable Noncontrolling Interest in partially owned properties	—		—		1,513		—		1,513		—		—		—		1,513
Change in fair value of interest rate swap agreement	—		—		—		1,753		1,753		—		—		—		1,753
Adjustment for Noncontrolling Interests ownership in Operating Partnership	—		(727)		—		—		(727)		727		—		727		—
Net income	—		—		62,958		—		62,958		3,252		74		3,326		66,284
Balance as of September 30, 2022	$	2,268	$	3,648,983	$	(838,729)	$	5,323	$	2,817,845	$	146,426	$	1,111	$	147,537	$	2,965,382

The accompanying notes are an integral part of these consolidated financial statements.

6

Physicians Realty Trust

Consolidated Statements of Equity

(In thousands) (Unaudited)

	Par Value		Additional Paid in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’  Equity		Operating Partnership Noncontrolling Interest		Partially Owned Properties  Noncontrolling Interest		Total Noncontrolling Interests		Total Equity
Balance at December 31, 2020	$	2,096	$	3,303,231	$	(658,171)	$	(5,859)	$	2,641,297	$	73,302	$	403	$	73,705	$	2,715,002
Net proceeds from sale of common shares	28		52,404		—		—		52,432		—		—		—		52,432
Restricted share award grants, net	4		(333)		(664)		—		(993)		—		—		—		(993)
Purchase of OP Units	—		—		—		—		—		(269)		—		(269)		(269)
Dividends/distributions declared	—		—		(49,011)		—		(49,011)		(1,243)		—		(1,243)		(50,254)
Preferred distributions	—		—		(13)		—		(13)		—		—		—		(13)
Distributions	—		—		—		—		—		—		(73)		(73)		(73)
Change in market value of Redeemable Noncontrolling Interests	—		(23)		896		—		873		—		—		—		873
Change in fair value of interest rate swap agreements	—		—		—		797		797		—		—		—		797
Adjustment for Noncontrolling Interests ownership in Operating Partnership	—		1,136		—		—		1,136		(1,136)		—		(1,136)		—
Net income	—		—		17,194		—		17,194		459		76		535		17,729
Balance as of March 31, 2021	$	2,128	$	3,356,415	$	(689,769)	$	(5,062)	$	2,663,712	$	71,113	$	406	$	71,519	$	2,735,231
Net proceeds from sale of common shares	46		82,781		—		—		82,827		—		—		—		82,827
Restricted share award grants, net	—		3,242		(482)		—		2,760		—		—		—		2,760
Purchase of OP Units	—		—		—		—		—		(5,063)		—		(5,063)		(5,063)
Dividends/distributions declared	—		—		(50,061)		—		(50,061)		(1,242)		—		(1,242)		(51,303)
Distributions	—		—		—		—		—		—		(50)		(50)		(50)
Change in market value of Redeemable Noncontrolling Interests	—		—		(388)		—		(388)		—		—		—		(388)
Change in fair value of interest rate swap agreements	—		—		—		543		543		—		—		—		543
Adjustment for Noncontrolling Interests ownership in Operating Partnership	—		(2,124)		—		—		(2,124)		2,124		—		2,124		—
Net income	—		—		18,113		—		18,113		417		76		493		18,606
Balance as of June 30, 2021	$	2,174	$	3,440,314	$	(722,587)	$	(4,519)	$	2,715,382	$	67,349	$	432	$	67,781	$	2,783,163
Net proceeds from sale of common shares	—		(117)		—		—		(117)		—		—		—		(117)
Restricted share award grants, net	—		3,642		113		—		3,755		—		—		—		3,755
Dividends/distributions declared	—		—		(50,062)		—		(50,062)		(1,233)		—		(1,233)		(51,295)
Distributions	—		—		—		—		—		—		(51)		(51)		(51)
Change in market value of Redeemable Noncontrolling Interests	—		—		22		—		22		—		—		—		22
Change in fair value of interest rate swap agreements	—		—		—		465		465		—		—		—		465
Adjustment for Noncontrolling Interests ownership in Operating Partnership	—		(91)		—		—		(91)		91		—		91		—
Net income	—		—		21,364		—		21,364		529		76		605		21,969
Balance as of September 30, 2021	$	2,174	$	3,443,748	$	(751,150)	$	(4,054)	$	2,690,718	$	66,736	$	457	$	67,193	$	2,757,911

The accompanying notes are an integral part of these consolidated financial statements.

7

Physicians Realty Trust

Consolidated Statements of Cash Flows

(In thousands) (Unaudited)

	Nine Months Ended September 30,
	2022		2021
Cash Flows from Operating Activities:
Net income	$	98,155	$	58,531
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	142,002		114,663
Amortization of deferred financing costs	1,739		1,744
Amortization of lease inducements and above/below-market lease intangibles	4,458		3,526
Straight-line rental revenue/expense	(5,359)		(7,276)
Amortization of discount on unsecured senior notes	794		489
Amortization of above market assumed debt	(10)		(47)
Gain on sale of investment properties, net	(57,375)		(5,111)
Equity in loss of unconsolidated entities	452		1,213
Distributions from unconsolidated entities	6,077		5,261
Provision for bad debts	269		(139)
Non-cash share compensation	12,400		10,840
Impairment on investment property	—		340
Change in operating assets and liabilities:
Tenant receivables	(5,927)		(2,913)
Other assets	(1,455)		3,300
Accounts payable	(125)		(1,247)
Accrued expenses and other liabilities	6,258		(7,427)
Net cash provided by operating activities	202,353		175,747
Cash Flows from Investing Activities:
Proceeds from sale of investment properties	123,179		31,093
Acquisition of investment properties, net	(111,587)		(120,617)
Investment in unconsolidated entities	(13,349)		(7,281)
Escrowed cash - acquisition deposits/earnest deposits	360		(1,154)
Capital expenditures on investment properties	(29,840)		(22,159)
Investment in real estate loans receivable	(29,618)		(14,406)
Repayment of real estate loans receivable	22,441		18,902
Leasing commissions	(2,766)		(3,343)
Lease inducements	(500)		—
Net cash used in investing activities	(41,680)		(118,965)
Cash Flows from Financing Activities:
Net proceeds from sale of common shares	31,446		135,142
Proceeds from credit facility borrowings	239,000		304,000
Repayment of credit facility borrowings	(251,000)		(311,000)
Principal payments on mortgage debt	(15,845)		(7,833)
Debt issuance costs	(67)		(5,300)
Payments made on financing lease	—		(1,700)
Dividends paid - shareholders	(156,854)		(148,478)
Distributions to noncontrolling interests - Operating Partnership	(8,191)		(3,792)
Preferred distributions paid - OP Unit holder	—		(303)
Contributions from noncontrolling interest	569		—
Distributions to noncontrolling interests - partially owned properties	(517)		(491)
Payments of employee taxes for withheld stock-based compensation shares	(4,255)		(4,183)
Purchase of Series A Preferred Units	—		(4,661)
Purchase of OP Units	(2,323)		(5,332)
Net cash used in financing activities	(168,037)		(53,931)
Net (decrease) increase in cash and cash equivalents	(7,364)		2,851
Cash and cash equivalents, beginning of period	9,876		2,515
Cash and cash equivalents, end of period	$	2,512	$	5,366
Supplemental disclosure of cash flow information—interest paid during the period	$	57,977	$	49,160
Supplemental disclosure of noncash activity—settlement of note receivable in exchange for Series A Preferred Units	$	—	$	20,646
Supplemental disclosure of noncash activity—change in fair value of interest rate swap agreements	$	6,215	$	1,805
Supplemental disclosure of noncash activity—conversion of loan receivable in connection to the acquisition of investment property	$	5,700	$	15,500

The accompanying notes are an integral part of these consolidated financial statements.

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Physicians Realty Trust

Notes to Consolidated Financial Statements

Unless otherwise indicated or unless the context requires otherwise, the use of the words “we,” “us,” “our,” and the “Company,” refer to Physicians Realty Trust, together with its consolidated subsidiaries, including Physicians Realty L.P.

Note 1. Organization and Business

Physicians Realty Trust (the “Trust” or the “Company”) was organized in the state of Maryland on April 9, 2013. As of September 30, 2022, the Trust was authorized to issue up to 500,000,000 common shares of beneficial interest, par value $0.01 per share. The Trust filed a Registration Statement on Form S-11 with the Commission with respect to a proposed underwritten initial public offering (the “IPO”) and completed the IPO of its common shares and commenced operations on July 24, 2013.

The Trust contributed the net proceeds from the IPO to Physicians Realty L.P, a Delaware limited partnership (the “Operating Partnership”), and is the sole general partner of the Operating Partnership. The Trust’s operations are conducted through the Operating Partnership and wholly-owned and majority-owned subsidiaries of the Operating Partnership. The Trust, as the general partner of the Operating Partnership, controls the Operating Partnership and consolidates the assets, liabilities, and results of operations of the Operating Partnership.

The Trust is a self-managed REIT formed primarily to acquire, selectively develop, own, and manage health care properties that are leased to physicians, hospitals, and health care delivery systems.

ATM Program

In May 2021, the Trust and the Operating Partnership entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with KeyBanc Capital Markets Inc., Credit Agricole Securities (USA) Inc., BMO Capital Markets Corp., and Raymond James & Associates, Inc. in their capacity as agents for the Company and/or forward sellers and Stifel, Nicolaus & Company, Incorporated in its capacity as sales agent for the Company (collectively, the “Agents”) and Bank of Montreal, Credit Agricole Corporate and Investments Bank, KeyBanc Capital Markets Inc., and Raymond James & Associates, Inc. as forward purchasers for the Company (the “Forward Purchasers”), pursuant to which the Trust may issue and sell, from time to time, its common shares having an aggregate offering price of up to $500 million through the Agents (the “ATM Program”). The Sales Agreement contemplates that, in addition to the issuance and sale of the Trust’s common shares through the Agents, the Trust may also enter into one or more forward sales agreements from time to time in the future with each of the Forward Purchasers.

During the quarters ended March 31, 2022, June 30, 2022 and September 30, 2022, the Trust issued and sold common shares through the ATM Program as follows (net proceeds in thousands):

	Common shares sold	Weighted average price		Net proceeds
Quarter ended March 31, 2022	259,977	$	18.93	$	4,871
Quarter ended June 30, 2022	977,800	18.61		18,020
Quarter ended September 30, 2022	440,400	18.15		7,913
Year to date	1,678,177	$	18.54	$	30,804

As of September 30, 2022, the Trust has $300.1 million of common shares remaining available under the ATM Program.

Note 2. Summary of Significant Accounting Policies

The accompanying unaudited consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods ended September 30, 2022 and 2021 pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited financial statements included in the Trust’s 2021 Annual Report. The Company has consistently applied its accounting policies to all periods presented in these consolidated financial statements.

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Noncontrolling Interests

As of September 30, 2022, the Trust held a 95.1% interest in the Operating Partnership. As the sole general partner and the majority interest holder, the Trust consolidates the financial position and results of operations of the Operating Partnership.

Redeemable Noncontrolling Interests - Partially Owned Properties

In connection with the Company’s acquisitions of the medical office building, ambulatory surgery center, and hospital located on the Great Falls Hospital campus in Great Falls, Montana, physicians affiliated with the sellers retained non-controlling interests which were, at the holders’ option, able to be redeemed at any time after May 1, 2023. Due to the redemption provision, which was outside of the control of the Trust, the Trust classified the investment in the mezzanine section of its consolidated balance sheets. On July 14, 2022, the Company disposed of these three properties and removed the related redeemable noncontrolling interest from its consolidated balance sheets.

Through a consolidated joint venture with MedProperties Realty Advisors, LLC (“MedProperties”), the Company acquired Calko Medical Center in Brooklyn, New York. As part of the joint venture, MedProperties can redeem its interest, at their option, at any time after September 9, 2025. Due to the redemption provision, which is outside of the control of the Company, the Company classifies the noncontrolling interests in the mezzanine section of its consolidated balance sheets. The Company records the carrying amount of the redeemable noncontrolling interests at the greater of the carrying value or redemption value.

Dividends and Distributions

On September 23, 2022, the Trust announced that its Board of Trustees authorized and the Trust declared a cash dividend of $0.23 per common share for the quarter ended September 30, 2022. The dividend was paid on October 14, 2022 to common shareholders and holders of record of partnership interests of the Operating Partnership (“OP Units”) as of the close of business on October 4, 2022.

Tax Status of Dividends and Distributions

The Company’s distributions of current and accumulated earnings and profits for U.S. federal income tax purposes generally are taxable to shareholders as ordinary income. Distributions in excess of these earnings and profits generally are treated as a non-taxable reduction of the shareholders’ basis in the shares to the extent thereof (non-dividend distributions) and thereafter as taxable gain.

Any cash distributions received by an OP Unit holder in respect of its OP Units generally will not be taxable to such OP Unit holder for U.S. federal income tax purposes, to the extent that such distribution does not exceed the OP Unit holder’s basis in its OP Units. Any such distribution will instead reduce the OP Unit holder’s basis in its OP Units (and OP Unit holders will be subject to tax on the taxable income allocated to them by the Operating Partnership in respect of their OP Units when such income is earned by the Operating Partnership, with such income allocation increasing the OP Unit holders’ basis in their OP Units).

The Company has elected taxable REIT subsidiary (“TRS”) status for certain of its corporate subsidiaries and, as a result, these entities will incur both federal and state income taxes on any taxable income of such entities after consideration of any net operating losses. To date, these income taxes have been de minimis.

Impairment of Intangible and Long-Lived Assets

The Company periodically evaluates its long-lived assets, primarily consisting of investments in real estate, for impairment indicators or whenever events or changes in circumstances indicate that the recorded amount of an asset may not be fully recoverable. The Company did not record impairment charges for the three and nine months ended September 30, 2022. The Company recorded an impairment charge of $0.3 million for the three and nine months ended September 30, 2021.

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Assets Held for Sale

The Company may sell properties from time to time for various reasons, including favorable market conditions. The Company classifies certain long-lived assets as held for sale once the criteria, as defined by GAAP, have been met. The Company classifies a real estate property as held for sale when: (i) management has approved the disposition of the property, (ii) the property is available for sale in its present condition, (iii) an active program to locate a buyer has been initiated, (iv) it is probable that the property will be disposed of within one year, (v) the property is being marketed at a reasonable price relative to its fair value, and (vi) it is unlikely that the disposition plan will significantly change or be withdrawn. Following the classification of a property as “held for sale,” no further depreciation or amortization is recorded for the asset and the book value of the asset is written down to the lower of carrying value or fair market value, less cost to sell. As of September 30, 2022, the Company did not classify any properties as held for sale.

Real Estate Loans Receivable, Net

Real estate loans receivable consists of nine mezzanine loans, five term loans, and one construction loan as of September 30, 2022. Generally, each mezzanine loan is collateralized by a pledge of the borrower’s ownership interest in the respective real estate owner, each term loan is secured by a mortgage on a related medical office building, and construction loans are secured by mortgages on the land and the improvements as constructed. The reserve for loan losses was $0.3 million as of September 30, 2022.

Rental and Related Revenues

Rental revenue is recognized on a straight-line basis over the terms of the related leases when collectability is probable. Recognizing rental revenue on a straight-line basis for leases may result in recognizing revenue for amounts more or less than amounts currently due from tenants. Amounts recognized in excess of amounts currently due from tenants, excluding assets classified as held for sale, are included in other assets and were approximately $99.5 million and $95.4 million as of September 30, 2022 and December 31, 2021, respectively. If the Company determines that collectability of straight-line rents is not probable, income recognition is limited to the lesser of cash collected, or lease income reflected on a straight-line basis, plus variable rent when it becomes accruable.

In accordance with ASC 842, Leases, Topic 842, if the collectability of a lease changes after the commencement date, any difference between lease income that would have been recognized and the lease payments shall be recognized as an adjustment to lease income. Bad debt recognized as an adjustment to rental and related revenues was $0.2 million for the nine months ended September 30, 2022 and insignificant for the nine months ended September 30, 2021.

Rental revenue is adjusted by the amortization of lease inducements and above-market or below-market rents on certain leases. Lease inducements and above-market or below-market rents are amortized on a straight-line basis over the remaining lease term. Rental and related revenues also include expense recoveries, which relate to tenant reimbursement of real estate taxes, insurance, and other operating expenses that are recognized in the period the applicable expenses are incurred. The reimbursements are recorded gross, as these costs are incurred by the Company and reimbursed by the tenants. We have certain tenants with absolute net leases. Under these lease agreements, the tenant is responsible for operating and building expenses and we do not recognize expense recoveries.

New Accounting Pronouncements

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting, that provides optional relief to applying reference rate reform to changing reference rates, contracts, hedging relationships, and other transactions that reference LIBOR, which has been discontinued at the end of 2021. The amendments in this update are effective immediately and may be applied through December 31, 2022, though in October 2022, the FASB extended this date through December 31, 2024. The Company will continue to use published LIBOR rates through June of 2023 at which time the Company does not expect the replacement benchmark to have a material impact on the Company’s consolidated financial statements.

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15,

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2021, with early adoption permitted. The Company adopted ASU 2020-06 on January 1, 2022, with no material effect on its consolidated financial statements.

Note 3. Investment and Disposition Activity

During the nine months ended September 30, 2022, the Company completed the acquisition of two medical office facilities for an investment of $109.2 million and acquired a 49% membership interest in three properties through Davis Medical Investors, LLC (the “Davis Joint Venture”) for an aggregate purchase price of $8.0 million. The Company also paid $6.0 million of additional purchase consideration under three earn-out agreements and funded one mezzanine loan for $5.8 million, three term loans for $22.2 million, and $1.7 million of previous construction loan commitments. Additionally, the Company invested $4.7 million in funds managed by a real estate technology private equity fund, resulting in total investment activity of approximately $157.6 million as of September 30, 2022. As part of these investments, the Company incurred approximately $2.2 million of capitalized costs.

Investment activity for the three months ended September 30, 2022, included the acquisition of one medical office facility for a purchase price of $81.5 million and the funding of two term loans for $14.1 million, $0.6 million of a previously announced term loan, and $0.4 million of previous construction loan commitments. The Company also paid $5.0 million of additional purchase consideration under two earn-out agreements and invested $0.3 million in funds managed by a real estate technology private equity fund, resulting in total investment activity of approximately $101.7 million as of September 30, 2022.

The following table summarizes the acquisition date fair values of the assets acquired and the liabilities assumed in connection with the acquisition of the two medical office facilities, as well as follow-on capitalized costs during the nine months ended September 30, 2022, which the Company determined using Level 2 and Level 3 inputs (in thousands):

	1st Quarter		2nd Quarter		3rd Quarter		Total
Land	$	—	$	1,400	$	7,685	$	9,085
Building and improvements	—		25,119		72,621		97,740
In-place lease intangibles	—		2,839		10,006		12,845
Above market in-place lease intangibles	—		588		2,180		2,768
Below market in-place lease intangibles	—		—		(4,923)		(4,923)
Right-of-use asset	—		79		—		79
Net assets acquired	$	—	$	30,025	$	87,569	$	117,594
Satisfaction of real estate loans receivable	—		(2,700)		—		(2,700)
NCI-redeemable	—		—		(3,307)		(3,307)
Cash used in acquisition of investment property	$	—	$	27,325	$	84,262	$	111,587

Dispositions

During the nine months ended September 30, 2022, the Company sold five medical facilities, which included four medical office buildings and one hospital, representing 212,295 square feet for approximately $124.7 million, realizing an aggregate net gain of approximately $57.4 million.

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Note 4. Intangibles

The following is a summary of the carrying amount of intangible assets and liabilities, excluding assets classified as held for sale if applicable, as of September 30, 2022 and December 31, 2021 (in thousands):

	September 30, 2022						December 31, 2021
	Cost		Accumulated Amortization		Net		Cost		Accumulated Amortization		Net
Assets
In-place leases	$	445,583	$	(230,930)	$	214,653	$	441,072	$	(201,885)	$	239,187
Above-market leases	$	59,752	$	(28,662)	$	31,090	$	57,149	$	(24,437)	$	32,712
Liabilities
Below-market leases	$	37,002	$	(12,032)	$	24,970	$	32,155	$	(10,585)	$	21,570

The following is a summary of acquired lease intangible amortization for the three and nine month periods ended September 30, 2022 and 2021 (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Amortization expense related to in-place leases	$	10,629	$	8,103	$	32,814	$	24,590
Decrease in rental income related to above-market leases	1,384		897		4,390		2,744
Increase in rental income related to below-market leases	556		324		1,522		963

Future aggregate net amortization of acquired lease intangibles as of September 30, 2022, is as follows (in thousands):

	Net Decrease in  Revenue		Net Increase in  Expenses
2022	$	845	$	10,712
2023	3,191		40,616
2024	2,929		34,718
2025	2,357		29,208
2026	1,203		23,095
Thereafter	(4,405)		76,304
Total	$	6,120	$	214,653

As of September 30, 2022, the weighted average remaining amortization period is 7 years for in-place and above-market lease intangibles assets and 16 years for below-market lease intangibles.

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Note 5. Other Assets

Other assets consisted of the following, excluding assets classified as held for sale, if applicable, as of September 30, 2022 and December 31, 2021 (in thousands):

	September 30, 2022		December 31, 2021
Straight line rent receivable, net	$	99,494	$	95,443
Prepaid expenses	13,866		8,910
Leasing commissions, net	12,887		11,627
Lease inducements, net	8,119		8,293
Interest rate swap	2,071		—
Escrows	1,434		1,780
Notes receivable, net	1,326		1,097
Other	4,372		4,434
Total	$	143,569	$	131,584

Note 6. Debt

The following is a summary of debt as of September 30, 2022 and December 31, 2021 (in thousands):

	September 30, 2022		December 31, 2021
Fixed interest mortgage notes (1)	$	59,906	$	75,395
Variable interest mortgage notes (2)	105,272		105,629
Total mortgage debt	165,178		181,024
$1.0 billion unsecured revolving credit facility bearing variable interest of LIBOR plus 0.85%, due September 2025	262,000		274,000
$400 million senior unsecured notes bearing fixed interest of 4.30%, due March 2027	400,000		400,000
$350 million senior unsecured notes bearing fixed interest of 3.95%, due January 2028	350,000		350,000
$500 million senior unsecured notes bearing fixed interest of 2.625%, due November 2031	500,000		500,000
$150 million senior unsecured notes bearing fixed interest of 4.03% to 4.74%, due January 2023 to 2031	150,000		150,000
$75 million senior unsecured notes bearing fixed interest of 4.09% to 4.24%, due August 2025 to 2027	75,000		75,000
Total principal	1,902,178		1,930,024
Unamortized deferred financing costs	(8,022)		(9,694)
Unamortized discounts	(7,629)		(8,423)
Unamortized fair value adjustments	—		11
Total debt	$	1,886,527	$	1,911,918

(1)As of September 30, 2022, fixed interest mortgage notes bear interest from 3.33% to 4.63%, due in 2024, with a weighted average interest rate of 3.85%. As of December 31, 2021, fixed interest mortgage notes bear interest from 3.33% to 4.83%, due in 2022 and 2024, with a weighted average interest rate of 4.05%. The notes are collateralized by two properties with a net book value of $95.7 million as of September 30, 2022 and three properties with a net book value of $151.9 million as of December 31, 2021. One mortgage bears interest at LIBOR + 1.90% and the Trust entered into a pay-fixed receive-variable interest rate swap, fixing the LIBOR component of this rate at 1.43%.

(2)Variable interest mortgage notes bear variable interest of LIBOR + 2.75% and SOFR + 1.85% for a weighted average interest rate of 4.87% and 1.95% as of September 30, 2022 and December 31, 2021, respectively. The notes are due in 2026 and 2028 and collateralized by four properties with a net book value of $297.7 million as of September 30, 2022 and $307.2 million as of December 31, 2021.

On September 24, 2021, the Operating Partnership, as borrower, and the Trust, as guarantor, executed a Third Amended and Restated Credit Agreement (the “Credit Agreement”) which extended the maturity date of the revolving credit facility under the Credit Agreement to September 24, 2025 and reduced the interest rate margin applicable to borrowings. The

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Credit Agreement includes an unsecured revolving credit facility of $1.0 billion and contains a term loan feature of $250.0 million, bringing total borrowing capacity to $1.3 billion. The Credit Agreement also includes a swingline loan commitment for up to 10% of the maximum principal amount and provides an accordion feature allowing the Operating Partnership to increase borrowing capacity by up to an additional $500.0 million, subject to customary terms and conditions, resulting in a maximum borrowing capacity of $1.75 billion. The revolving credit facility under the Credit Agreement also includes two, six-month extension options.

Borrowings under the Credit Agreement bear interest on the outstanding principal amount at an adjusted LIBOR rate, which is based on the Trust’s investment grade rating under the Credit Agreement. As of September 30, 2022, the Trust had investment grade ratings of BBB from S&P and Baa2 from Moody’s. As such, borrowings under the revolving credit facility of the Credit Agreement accrue interest on the outstanding principal at a rate of LIBOR + 0.85%. The Credit Agreement includes a facility fee equal to 0.20% per annum, which is also determined by the Trust’s investment grade rating.

On October 13, 2021, the Operating Partnership issued $500.0 million in aggregate principal amount of 2.625% Senior Notes due November 1, 2031 (the “2031 Senior Notes”) in a public offering and the Company used the proceeds from the 2031 Senior Notes to pay off a $250.0 million term loan feature of the Credit Agreement. The Operating Partnership simultaneously terminated the existing pay-fixed receive-variable rate swaps associated with the full term loan borrowing of $250.0 million. As part of the termination, the Company made total cash payments of $3.3 million to the counterparties of the swap agreements. As defined by the Credit Agreement, the term loan feature is no longer available to the Company.

Base Rate Loans, Adjusted LIBOR Rate Loans, and Letters of Credit (each, as defined in the Credit Agreement) will be subject to interest rates, based upon the Trust’s investment grade rating as follows:

Credit Rating	Applicable Margin for Revolving Loans: LIBOR Rate Loans and Letter of Credit Fee	Applicable Margin for Revolving Loans: Base Rate Loans		Applicable Margin for Term Loans: LIBOR Rate Loans and Letter of Credit Fee	Applicable Margin for Term Loans: Base Rate Loans
At Least A- or A3	LIBOR + 0.725%	—	%	LIBOR + 0.85%	—	%
At Least BBB+ or Baa1	LIBOR + 0.775%	—	%	LIBOR + 0.90%	—	%
At Least BBB or Baa2	LIBOR + 0.85%	—	%	LIBOR + 1.00%	—	%
At Least BBB- or Baa3	LIBOR + 1.05%	0.05	%	LIBOR + 1.25%	0.25	%
Below BBB- or Baa3	LIBOR + 1.40%	0.40	%	LIBOR + 1.65%	0.65	%

The Credit Agreement contains financial covenants that, among other things, require compliance with leverage and coverage ratios and maintenance of minimum tangible net worth, as well as covenants that may limit the Trust’s and the Operating Partnership’s ability to incur additional debt, grant liens, or make distributions. The Company may, at any time, voluntarily prepay any revolving or term loan under the Credit Agreement in whole or in part without premium or penalty. As of September 30, 2022, the Company was in compliance with all financial covenants related to the Credit Agreement.

The Credit Agreement includes customary representations and warranties by the Trust and the Operating Partnership and imposes customary covenants on the Operating Partnership and the Trust. The Credit Agreement also contains customary events of default, and if an event of default occurs and continues, the Operating Partnership is subject to certain actions by the administrative agent, including without limitation, the acceleration of repayment of all amounts outstanding under the Credit Agreement.

As of September 30, 2022, the Company had $262.0 million of borrowings outstanding under its unsecured revolving credit facility. As defined by the Credit Agreement, the current unencumbered borrowing base allows the Company to borrow an additional $738.0 million before reaching the maximum allowed under the credit facility.

Notes Payable

As of September 30, 2022, the Company had $1.5 billion aggregate principal amount of senior notes issued and outstanding by the Operating Partnership, comprised of $15.0 million maturing in 2023, $25.0 million maturing in 2025, $70.0 million maturing in 2026, $425.0 million maturing in 2027, $395.0 million maturing in 2028, and $545.0 million maturing in 2031.

Certain properties have mortgage debt that contains financial covenants. As of September 30, 2022, the Trust was in compliance with all mortgage debt financial covenants.

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Scheduled principal payments due on consolidated debt as of September 30, 2022 are as follows (in thousands):

2022	$	248
2023	16,008
2024	59,719
2025	287,476
2026	170,476
Thereafter	1,368,251
Total Payments	$	1,902,178

As of September 30, 2022, the Company had total consolidated indebtedness of approximately $1.9 billion. The weighted average interest rate on consolidated indebtedness was 3.75% (based on the 30-day LIBOR rate of 2.92% and a SOFR rate of 2.98% as of September 30, 2022).

For the three months ended September 30, 2022 and 2021, the Company incurred interest expense on its debt, exclusive of deferred financing cost amortization, of $17.7 million and $12.9 million, respectively. For the nine months ended September 30, 2022 and 2021, the Company incurred interest expense on its debt, exclusive of deferred financing cost amortization, of $50.6 million and $39.0 million, respectively.

Note 7. Derivatives

In the normal course of business, a variety of financial instruments are used to manage or hedge interest rate risk. The Company has implemented ASC 815, Derivatives and Hedging (“ASC 815”), which establishes accounting and reporting standards requiring that all derivatives, including certain derivative instruments embedded in other contracts, be recorded as either an asset or a liability measured at their fair value unless they qualify for a normal purchase or normal sales exception.

When specific hedge accounting criteria are not met, ASC 815 requires that changes in a derivative’s fair value be recognized currently in earnings. Changes in the fair market values of the Company’s derivative instruments are recorded in the consolidated statements of income if such derivatives do not qualify for, or the Company does not elect to apply for, hedge accounting. As a result of the Company’s adoption of ASU 2017-12 as of January 1, 2019, the entire change in the fair value of its derivatives designated and qualified as cash flow hedges are recorded in accumulated other comprehensive income on the consolidated balance sheets and are subsequently reclassified into earnings in the period in which the hedged forecasted transaction affects earnings.

To manage interest rate risk for certain of its variable-rate debt, the Company uses interest rate swaps as part of its risk management strategy. These derivatives are designed to mitigate the risk of future interest rate increases by providing a fixed interest rate for a limited, pre-determined period of time. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate 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. As of September 30, 2022, the Company had one outstanding interest rate swap contract designated as a cash flow hedge of interest rate risk. See Note 2 (Summary of Significant Accounting Policies) of the 2021 Annual Report for a further discussion of our derivatives. In addition, the Company recognizes its share of other comprehensive income (loss) related to derivative instruments held by unconsolidated entities.

The following table summarizes the location and aggregate fair value of the interest rate swaps on the Company’s consolidated balance sheets (in thousands):

Total notional amount		$	36,050
Effective fixed interest rate	(1)	3.33		%
Effective date		10/31/2019
Maturity date		10/31/2024
Asset balance at September 30, 2022 (included in Other assets)		$	2,071
Liability balance at December 31, 2021 (included in Accrued expenses and other liabilities)		$	452

(1)1.43% effective swap rate plus 1.90% spread per hedging agreement.

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Note 8. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consisted of the following as of September 30, 2022 and December 31, 2021 (in thousands):

	September 30, 2022		December 31, 2021
Real estate taxes payable	$	29,173	$	23,487
Prepaid rent	24,556		22,714
Accrued interest	11,208		18,799
Accrued expenses	8,694		5,960
Accrued incentive compensation	5,166		1,784
Security deposits	4,451		4,234
Tenant improvement allowances	1,831		1,857
Interest rate swap	—		452
Other	7,415		6,967
Total	$	92,494	$	86,254

Note 9. Stock-based Compensation

The Company follows ASC 718, Compensation - Stock Compensation (“ASC 718”), in accounting for its share-based payments. This guidance requires measurement of the cost of employee services received in exchange for stock compensation based on the grant-date fair value of the employee stock awards. This cost is recognized as compensation expense ratably over the employee’s requisite service period. Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized when incurred. Share-based payments classified as liability awards are marked to fair value at each reporting period. Any common shares issued pursuant to the Company's incentive equity compensation and employee stock purchase plans will result in the Operating Partnership issuing OP Units to the Trust on a one-for-one basis, with the Operating Partnership receiving the net cash proceeds of such issuances.

Certain of the Company’s employee stock awards vest only upon the achievement of performance targets. ASC 718 requires recognition of compensation cost only when achievement of performance conditions is considered probable. Consequently, the Company’s determination of the amount of stock compensation expense requires judgment in estimating the probability of achievement of these performance targets. Subsequent changes in actual experience are monitored and estimates are updated as information is available.

In connection with the IPO, the Trust adopted the 2013 Equity Incentive Plan, which made shares available for awards for participants. On April 30, 2019, at the Annual Meeting of Shareholders of Physicians Realty Trust, the Trust’s shareholders approved the Amended and Restated Physicians Realty Trust 2013 Equity Incentive Plan (“2013 Plan”). The amendment increased the number of common shares authorized for issuance under the 2013 Plan to a total of 7,000,000 common shares authorized for issuance. The 2013 Plan term was also extended to 2029.

Restricted Common Shares

Restricted common shares granted under the 2013 Plan are eligible for dividends as well as the right to vote. In the nine month period ended September 30, 2022, the Trust granted a total of 247,579 restricted common shares with a total value of $4.1 million to its officers and certain of its employees. These awards have a vesting period of one to three years.

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A summary of the status of the Trust’s non-vested restricted common shares as of September 30, 2022 and changes during the nine month period then ended follow:

	Common Shares	Weighted Average Grant Date Fair Value
Non-vested at December 31, 2021	247,447	$	17.41
Granted	247,579	16.53
Vested	(213,572)	17.29
Forfeited	(5,356)	18.01
Non-vested at September 30, 2022	276,098	$	16.70

For all service awards, the Company records compensation expense for the entire award on a straight-line basis over the requisite service period. For the three months ended September 30, 2022 and 2021, the Company recognized non-cash share compensation of $1.0 million. For the nine months ended September 30, 2022 and 2021, the Company recognized non-cash share compensation of $2.9 million and $2.8 million, respectively. Unrecognized compensation expense at September 30, 2022 was $2.5 million.

Restricted Share Units

In January 2022, under the 2013 Plan, the Company granted 7,800 restricted share units to certain of its trustees in lieu of all or a portion of such trustee’s 2022 cash retainer. These units are subject to certain timing conditions and a one-year service period. Each restricted share unit contains one dividend equivalent. Each recipient will accrue dividend equivalents on awarded share units equal to the cash dividend that would have been paid on the awarded share unit had the awarded share unit been an issued and outstanding common share on the record date for the dividend. With respect to the performance and timing conditions of the January 2022 grants, the grant date fair value of $18.83 per unit was based on the share price at the date of grant.

In March 2022, under the 2013 Plan, the Company granted restricted share units at a target level of 299,019 to its officers and certain of its employees and 56,204 to its trustees. Units granted to officers and certain employees under the Company’s 2013 Plan are subject to certain performance and market conditions and a three-year service period. Units granted to trustees are subject to certain timing conditions and a two-year service period for full vesting. Each restricted share unit contains one dividend equivalent. Each recipient will accrue dividend equivalents on awarded share units equal to the cash dividend that would have been paid on the awarded share unit had the awarded share unit been an issued and outstanding common share on the record date for the dividend.

Approximately 30% of the restricted share units issued to officers and certain employees under the Company’s 2013 Plan in 2022 vest based on a certain market condition. The awards containing the market condition were valued with the assistance of independent valuation specialists. The Company utilized a Monte Carlo simulation to calculate the weighted average grant date fair value of $30.17 per unit for the March 2022 grant using the following assumptions:

Volatility	33.9		%
Dividend assumption	reinvested
Expected term in years	2.84 years
Risk-free rate	1.44		%
Share price (per share)	$	16.37

The remaining 70% of the restricted share units issued to officers and certain employees under the Company’s 2013 Plan, and 100% of other restricted share units issued to trustees vest based upon certain performance or timing conditions. With respect to the performance and timing conditions of the March 2022 grants, the grant date fair value of $16.37 per unit was based on the share price at the date of grant. The combined weighted average grant date fair value of the March 2022 restricted share units issued to officers and certain employees is $20.51 per unit.

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The following is a summary of the activity in the Trust’s restricted share units during the nine months ended September 30, 2022: 

	Executive Awards				Trustee Awards
	Restricted Share Units		Weighted Average Grant Date Fair Value		Restricted Share Units	Weighted Average Grant Date Fair Value
Non-vested at December 31, 2021	976,570		$	22.59	63,008	$	17.85
Granted	299,019		20.51		64,004	16.67
Vested	(228,649)	(1)	25.27		(41,220)	18.20
Non-vested at September 30, 2022	1,046,940		$	21.41	85,792	$	16.81

(1)Restricted units vested by Company executives in 2022 resulted in the issuance of 361,679 common shares, less 160,573 common shares withheld to cover minimum withholding tax obligations.

For the three months ended September 30, 2022 and 2021, the Company recognized non-cash share compensation of $3.3 million and $2.7 million, respectively. For the nine months ended September 30, 2022 and 2021, the Company recognized non-cash share compensation of $9.4 million and $8.0 million, respectively. Unrecognized compensation expense at September 30, 2022 was $14.1 million.

Note 10. Fair Value Measurements

ASC Topic 820, Fair Value Measurement (“ASC 820”), requires certain assets and liabilities be reported and/or disclosed at fair value in the financial statements and provides a framework for establishing that fair value. The framework for determining fair value is based on a hierarchy that prioritizes the valuation techniques and inputs used to measure fair value.

In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset. These Level 3 fair value measurements are based primarily on management’s own estimates using pricing models, discounted cash flow methodologies, or similar techniques taking into account the characteristics of the asset or liability. In instances where inputs used to measure fair value fall into different levels of the fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability. As part of the Company’s acquisition process, Level 3 inputs are used to measure the fair value of the assets acquired and liabilities assumed.

The Company’s derivative instruments as of September 30, 2022 consist of one interest rate swap, as detailed in the Derivative Instruments section of Note 7 (Derivatives) of this report and Note 2 (Summary of Significant Accounting Policies) of Part II, Item 8 (Financial Statements and Supplementary Data) of our 2021 Annual Report.

The interest rate swap is not traded on an exchange. The Company’s derivative assets and liabilities are recorded at fair value based on a variety of observable inputs including contractual terms, interest rate curves, yield curves, measure of volatility, and correlations of such inputs. The Company measures its derivatives at fair value on a recurring basis. The fair values are based on Level 2 inputs described above. The Company considers its own credit risk, as well as the credit risk of its counterparties, when evaluating the fair value of its derivatives.

The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. This generally includes assets subject to impairment. There were no such assets measured at fair value as of September 30, 2022.

The carrying amounts of cash and cash equivalents, tenant receivables, payables, and accrued interest are reasonable estimates of fair value because of the short-term maturities of these instruments. Fair values for real estate loans receivable and mortgage debt are estimated based on rates currently prevailing for similar instruments of similar maturities and are based primarily on Level 2 inputs.

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The following table presents the fair value of the Company’s financial instruments (in thousands):

	September 30, 2022				December 31, 2021
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets:
Real estate loans receivable, net	$	120,432	$	116,406	$	117,844	$	115,385
Notes receivable, net	$	1,326	$	1,326	$	1,097	$	1,097
Derivative assets	$	2,071	$	2,071	$	—	$	—
Liabilities:
Credit facility	$	(262,000)	$	(262,000)	$	(274,000)	$	(274,000)
Notes payable	$	(1,475,000)	$	(1,282,653)	$	(1,475,000)	$	(1,554,802)
Mortgage debt	$	(165,178)	$	(163,111)	$	(181,035)	$	(182,189)
Derivative liabilities	$	—	$	—	$	(452)	$	(452)

Note 11. Tenant Operating Leases

The Company is a lessor of medical office buildings and other health care facilities. Leases have expirations from 2022 through 2042. As of September 30, 2022, the future minimum rental payments on non-cancelable leases, exclusive of expense recoveries and minimum rental payments for assets classified as held for sale, if applicable, were as follows (in thousands):

2022	$	89,516
2023	356,202
2024	342,641
2025	321,991
2026	264,367
Thereafter	896,326
Total	$	2,271,043

For the three months ended September 30, 2022 and 2021, the Company recognized $127.4 million and $110.3 million, respectively, of rental and other lease-related income related to our operating leases, of which $36.6 million and $29.2 million, respectively, were variable lease payments. For the nine months ended September 30, 2022 and 2021, the Company recognized $381.8 million and $326.0 million, respectively, of rental and other lease-related income related to our operating leases, of which $107.5 million and $84.0 million, respectively, were variable lease payments.

Note 12. Rent Expense

The Company leases the rights to parking structures at two of its properties, the air space above one property, and the land upon which 97 of its properties are located from third party land owners pursuant to separate leases. In addition, the Company has nine corporate leases, primarily for office space.

The Company’s leases include both fixed and variable rental payments and may also include escalation clauses and renewal options. These leases have terms of up to 92 years remaining, excluding extension options, with a weighted average remaining term of 44 years.

At the inception of a new lease, the Company establishes an operating or finance lease asset and operating or finance lease liability calculated as the present value of future minimum lease payments. As our leases do not provide an implicit rate, we calculate a discount rate that approximates our incremental borrowing rate available at lease commencement to determine the present value of future minimum lease payments. The approximated weighted average discount rate was 4.4% as of September 30, 2022. There are no operating or finance leases that have not yet commenced that would have a significant impact on the Company’s consolidated balance sheets.

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As of September 30, 2022, the future minimum lease obligations under non-cancelable parking, air, ground, and corporate leases were as follows (in thousands):

2022	$	1,160
2023	4,798
2024	4,770
2025	4,751
2026	4,752
Thereafter	243,544
Total undiscounted lease payments	$	263,775
Less: Interest	(158,870)
Present value of lease liabilities	$	104,905

Lease costs consisted of the following for the nine months ended September 30, 2022 (in thousands):

Fixed lease cost	$	2,476
Variable lease cost	959
Total lease cost	$	3,435

Note 13. Credit Concentration

The Company uses gross leasable area (“GLA”) as its credit concentration metric. The following table summarizes certain information about the Company’s top five tenant credit concentrations as of September 30, 2022:

Tenant	Total Leased GLA	Percent of Leased GLA
CommonSpirit - CHI - Nebraska	899,928	6.1	%
Northside Hospital	684,941	4.6	%
UofL Health - Louisville, Inc.	617,157	4.2	%
HonorHealth	415,791	2.8	%
US Oncology	403,751	2.7	%
Remaining portfolio	11,735,241	79.6	%
Total	14,756,809	100.0	%

GLA from the Company’s top five tenant relationships comprises 20.4% of its total leased GLA as of September 30, 2022. Total GLA from CommonSpirit Health affiliated tenants totals 18.8%, including the affiliates disclosed above.

The following table summarizes certain information about the Company’s top five geographic concentrations as of September 30, 2022:

State	Total GLA	Percent of GLA
Texas	1,863,733	12.0	%
Georgia	1,071,182	6.9	%
Indiana	1,042,071	6.7	%
Nebraska	981,490	6.3	%
Kentucky	980,639	6.3	%
Other	9,594,439	61.8	%
Total	15,533,554	100.0	%

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Note 14. Earnings Per Share

The following table shows the amounts used in computing the Trust’s basic and diluted earnings per share (in thousands, except share and per share data):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Numerator for earnings per share - basic:
Net income	$	66,280	$	22,045	$	98,155	$	58,531
Net income attributable to noncontrolling interests:
Operating Partnership	(3,252)		(529)		(4,830)		(1,405)
Partially owned properties	(70)		(152)		(384)		(455)
Preferred distributions	—		—		—		(13)
Numerator for earnings per share - basic	$	62,958	$	21,364	$	92,941	$	56,658
Numerator for earnings per share - diluted:
Numerator for earnings per share - basic	$	62,958	$	21,364	$	92,941	$	56,658
Noncontrolling interest - Operating Partnership income	3,252		529		4,830		1,405
Numerator for earnings per share - diluted	$	66,210	$	21,893	$	97,771	$	58,063
Denominator for earnings per share - basic and diluted:
Weighted average number of shares outstanding - basic	226,529,041		217,406,657		225,743,856		214,616,482
Effect of dilutive securities:
Noncontrolling interest - Operating Partnership units	11,791,685		5,406,070		11,872,328		5,498,046
Restricted common shares	100,790		98,597		105,170		95,999
Restricted share units	1,476,946		1,080,725		1,424,029		1,189,122
Denominator for earnings per share - diluted:	239,898,462		223,992,049		239,145,383		221,399,649
Earnings per share - basic	$	0.28	$	0.10	$	0.41	$	0.26
Earnings per share - diluted	$	0.28	$	0.10	$	0.41	$	0.26

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

The following discussion should be read in conjunction with our unaudited consolidated financial statements, including the notes to those statements, included in Part I, Item 1 of this report, and the Section entitled “Cautionary Statement Regarding Forward-Looking Statements” in this report. As discussed in more detail in the Section entitled “Cautionary Statement Regarding Forward-Looking Statements,” this discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause those differences include those discussed in Part I, Item 1 (Business) and Part I, Item 1A (Risk Factors) of our 2021 Annual Report.

Third Quarter Highlights:

•Reported third quarter 2022 total revenue of $131.5 million, an increase of 14.1% over the prior year period.

•Generated third quarter net income per share of $0.28 on a fully diluted basis, compared to net income per share of $0.10 for the same period last year.

•Generated third quarter Normalized Funds From Operations (Normalized FFO) of $0.26 per share on a fully diluted basis, consistent with the same period last year.

•Completed $101.7 million of investments, including the funding of previous construction loan commitments during the third quarter.

•Third quarter MOB Same-Store Cash Net Operating Income growth was 1.1% year-over-year.

•Declared a quarterly dividend of $0.23 per share and OP Unit for the third quarter 2022, paid on October 14, 2022.

•Disposed of three related properties in Great Falls, Montana for $116.3 million and recognized a net gain on the sale of approximately $53.9 million.

•Sold 440,400 common shares pursuant to the ATM program at a weighted average price of $18.15 during the third quarter, resulting in net proceeds of $7.9 million.

Subsequent Event Highlights:

•Earned a score of 75 out of 100 and a Green Star designation in the 2022 GRESB Real Estate Assessment and a score of 98 out of 100 and an “A” rating for its GRESB Public Disclosure Level.

Overview

We are a self-managed health care real estate company organized in April 2013 to acquire, selectively develop, own, and manage health care properties that are leased to physicians, hospitals, and health care delivery systems. We invest in real estate that is integral to providing high quality health care services. Our properties are typically located on a campus with a hospital or other health care facilities or strategically affiliated with a hospital or other health care facilities. We believe the impact of government programs and continuing trends in the health care industry create attractive opportunities for us to invest in health care related real estate. In particular, we believe the demand for health care will continue to increase as a result of the aging population as older persons generally utilize health care services at a rate well in excess of younger people. Our management team has significant public health care REIT experience and has long-established relationships with physicians, hospitals, and health care delivery system decision makers that we believe will provide quality investment and growth opportunities. Our principal investments include medical office buildings, outpatient treatment facilities, as well as other real estate integral to health care providers. In recent years, we have seen increased competition for health care properties and we expect this trend to continue. We seek to generate attractive risk-adjusted returns for our shareholders through a combination of stable and increasing dividends and potential long-term appreciation in the value of our properties and our common shares.

We grew our portfolio of gross real estate investments from approximately $124 million at the time of our IPO in July 2013 to approximately $5.8 billion as of September 30, 2022. As of September 30, 2022, our consolidated portfolio consisted of 277 health care properties located in 32 states with approximately 15,533,554 net leasable square feet, which were approximately 95% leased with a weighted average remaining lease term of approximately 5.7 years. As of September 30, 2022, approximately 90% of the net leasable square footage of our portfolio was either on the campus of a hospital or strategically affiliated with a health system.

We receive a cash rental stream from the health care providers under our leases. Approximately 95% of the annualized base rent payments from our properties as of September 30, 2022 are from absolute and triple-net leases pursuant to which the tenants are responsible for operating expenses relating to the property, including but not limited to real estate taxes, utilities, property insurance, routine maintenance and repairs, and property management. This structure helps insulate us from increases in certain operating expenses and provides more predictable cash flow. Approximately 4% of the annualized base rent payments

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from our properties as of September 30, 2022 are from modified gross base stop leases which allow us to pass through certain increases in future operating expenses (e.g., property tax and insurance) to tenants for reimbursement, thus protecting us from increases in such operating expenses.

We seek to structure our triple-net leases to generate attractive returns on a long-term basis. Our leases typically have initial terms of 5 to 15 years and include annual rent escalators of approximately 1.5% to 4.0%, with an annual weighted average rent escalator of approximately 2.4%. Certain of the Company’s leases include provisions indexing annual rent escalators to changes in Consumer Price Index (“CPI”), often with a floor or ceiling. As of September 30, 2022, approximately 5.6% of the Company’s annual rent escalators have CPI provisions. Our operating results depend significantly upon the ability of our tenants to make required rental payments. We believe that our portfolio of medical office buildings and other health care facilities will enable us to generate stable cash flows over time because of the diversity of our tenants, staggered lease expiration schedule, long-term leases, and low historical occurrence of tenants defaulting under their leases. As of September 30, 2022, leases representing approximately 1.0%, 4.7%, and 6.2% of leased square feet will expire in 2022, 2023, and 2024, respectively.

We intend to grow our portfolio of high-quality health care properties leased to physicians, hospitals, health care delivery systems, and other health care providers primarily through acquisitions of existing health care facilities that provide stable revenue growth and predictable long-term cash flows. We may also selectively finance the development of new health care facilities through joint venture or fee arrangements with health care real estate developers or health system development professionals. Generally, we expect to make investments in new development properties when approximately 80% or more of the development property has been pre-leased before construction commences. We seek to invest in properties where we can develop strategic alliances with financially sound health care providers and health care delivery systems that offer need-based health care services in sustainable health care markets. We focus our investment activity on medical office buildings and ambulatory surgery centers.

We believe that trends such as shifting consumer preferences, limited space in hospitals, the desire of patients and health care providers to limit non-essential services provided in a hospital setting, and cost considerations, continue to drive the industry towards performing more procedures in outpatient facilities versus the hospital setting. As these trends continue, we believe that demand for medical office buildings and similar health care properties away from hospital settings and in convenient locations to patients will continue to rise. We intend to exploit this trend and seek outpatient properties consistent with our investment philosophy and strategies.

While not our focus, we may choose to invest opportunistically in life science facilities, senior housing properties, skilled nursing facilities, specialty hospitals, and treatment centers. Consistent with our qualification as a REIT, we may also opportunistically invest in companies that provide health care services, and in joint venture entities with operating partners, structured to comply with the REIT Investment Diversification Act of 2007.

The Trust is a Maryland real estate investment trust and elected to be taxed as a REIT for U.S. federal income tax purposes. We conduct our business through an UPREIT structure in which our properties are owned by our Operating Partnership directly or through limited partnerships, limited liability companies, or other subsidiaries. The Trust is the sole general partner of our Operating Partnership and, as of September 30, 2022, owned approximately 95.1% of the OP Units. As of October 26, 2022, there were 228,260,860 common shares outstanding.

Key Transactions in Third Quarter 2022

Investment Activity

During the three months ended September 30, 2022, the Company completed the acquisition of one medical office facility for purchase price of $81.5 million and the funding of two term loans for $14.1 million, $0.6 million of a previously announced term loan, and $0.4 million of previous construction loan commitments. The Company also paid $5.0 million of additional purchase consideration under two earn-out agreements and invested $0.3 million in funds managed by a real estate technology private equity fund, resulting in total investment activity of approximately $101.7 million as of September 30, 2022.

During the three months ended September 30, 2022, the Company sold three related facilities, which included two medical office buildings and one hospital, representing 185,085 square feet for approximately $116.3 million, realizing an aggregate net gain of approximately $53.9 million.

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Recent Developments

Quarterly Distribution

On September 23, 2022, we announced that our Board of Trustees authorized and declared a cash distribution of $0.23 per common share for the quarterly period ended September 30, 2022. The dividend was paid on October 14, 2022 to common shareholders and OP Unit holders of record as of the close of business on October 4, 2022.

Recent Events

The Company did not suffer any material losses related to Hurricane Ian. We own 12 properties, representing approximately 673,000 square feet, in the path of the storm and experienced minimal operational disruptions with no impact on rent collection from any of our tenants.

Results of Operations

Three months ended September 30, 2022 compared to the three months ended September 30, 2021.

The following table summarizes our results of operations for the three months ended September 30, 2022 and 2021 (in thousands):

	2022		2021		Change		%
Revenues:
Rental and related revenues	$	127,381	$	110,314	$	17,067	15.5	%
Interest income on real estate loans and other	4,132		4,997		(865)		(17.3)	%
Total revenues	131,513		115,311		16,202		14.1	%
Expenses:
Interest expense	18,299		13,498		4,801		35.6	%
General and administrative	10,079		9,534		545		5.7	%
Operating expenses	43,647		35,679		7,968		22.3	%
Depreciation and amortization	47,040		38,582		8,458		21.9	%
Impairment loss	—		340		(340)		NM
Total expenses	119,065		97,633		21,432		22.0	%
Income before equity in loss of unconsolidated entities and gain on sale of investment properties, net:	12,448		17,678		(5,230)		(29.6)	%
Equity in loss of unconsolidated entities	(62)		(390)		328		84.1	%
Gain on sale of investment properties, net	53,894		4,757		49,137		NM
Net income	$	66,280	$	22,045	$	44,235	200.7	%

NM = Not Meaningful

Revenues

Total revenues increased $16.2 million, or 14.1%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. An analysis of selected revenues follows.

Rental and related revenues. Rental and related revenues increased $17.1 million, or 15.5%, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. Rental and related revenues were comprised of the following based upon contractual billing terms (in thousands):

	2022		2021		Change		%
Rental revenues	$	90,818	$	81,096	$	9,722	12.0	%
Expense recoveries	36,563		29,218		7,345		25.1	%
Rental and related revenues	$	127,381	$	110,314	$	17,067	15.5	%

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Rental revenues increased $9.7 million, or 12.0%, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. Rental revenues increased $13.0 million from properties acquired in 2022 and 2021, including $9.6 million related to the 14 medical office buildings acquired on December 20, 2021 from Landmark Healthcare Facilities LLC (the “Landmark Portfolio”). These increases were partially offset by a decrease of $2.7 million related to properties sold in 2022 and 2021 and $0.5 million related to net decreases on our existing portfolio due to move outs.

Expense recoveries increased $7.3 million, or 25.1%, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. Expense recoveries increased $7.0 million from properties acquired in 2022 and 2021, including $5.4 million related to the Landmark Portfolio in 2021, and $0.7 million due to an increase in reimbursable operating expenses from our existing portfolio, explained below. These increases were partially offset by a decrease of $0.1 million related to properties sold in 2022 and 2021.

Interest income on real estate loans and other. Interest income on real estate loans and other decreased $0.9 million, or 17.3%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Interest income on real estate loans and other decreased $1.3 million due to lower average real estate loan balances in 2022 compared to 2021. This was offset by an increase in income due to tenant improvement and capital expenditures of $0.4 million.

Expenses

Total expenses increased $21.4 million, or 22.0%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. An analysis of selected expenses follows.

Interest expense. Interest expense increased $4.8 million, or 35.6%, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The issuance of the 2031 Senior Notes resulted in an increase of $3.4 million, new mortgage debt resulted in an increase of $1.4 million, a higher effective interest rate on our credit facility resulted in an increase of $1.1 million, and higher debt balances resulted in an increase of $0.3 million. Our weighted average effective interest rate on our credit facility was 3.0% and 1.0% for three months ended September 30, 2022 and 2021, respectively. These increases were partially offset by the October 2021 pay off and extinguishment of our $250.0 million term loan feature of the Credit Agreement and the associated pay-fixed receive-variable rate swaps, which resulted in a decrease of $0.7 million and $0.7 million, respectively.

General and administrative. General and administrative expenses increased $0.5 million, or 5.7%, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The increase was primarily due to higher non-cash compensation of $0.7 million. These increases were partially offset by lower marketing costs of $0.1 million.

Operating expenses. Operating expenses increased $8.0 million, or 22.3%, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. Net operating expenses from properties acquired in 2022 and 2021 increased by $7.4 million, including $5.8 million related to the Landmark Portfolio in 2021. Operating expenses on the existing portfolio increased by $0.7 million, or 2.0% quarter over quarter, mainly due to higher utility costs of $1.4 million and maintenance costs of $0.4 million, which were partially offset by lower real estate taxes of $0.9 million and lower insurance costs of $0.3 million.

Depreciation and amortization. Depreciation and amortization increased $8.5 million, or 21.9%, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. Depreciation and amortization increased $10.2 million for properties purchased in 2022 and 2021, including $7.6 million related to the Landmark Portfolio in 2021. These increases were partially offset by $1.2 million related to properties sold during 2022 and 2021 and $0.6 million related to our existing portfolio due to fully amortized lease intangibles.

Impairment loss. During the three months ended September 30, 2021, the Company recorded an impairment charge of $0.3 million related to a medical office building in Traverse City, Michigan. The Company did not record any impairment loss during the three months ended September 30, 2022.

Equity in loss of unconsolidated entities. The change in equity in loss of unconsolidated entities for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 is primarily due to our additional investments in the Davis Joint Venture.

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Gain on sale of investment properties, net. During the three months ended September 30, 2022, we sold three related facilities, which included two medical office buildings and one hospital in Great Falls, Montana, representing 185,085 square feet for approximately $116.3 million, realizing an aggregate net gain of approximately $53.9 million. During the three months ended September 30, 2021, we sold two properties representing 93,332 net leasable square feet located in Indiana for approximately $27.4 million, realizing a net gain of approximately $4.8 million.

Nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

The following table summarizes our results of operations for the nine months ended September 30, 2022 and 2021 (in thousands):

	2022		2021		Change		%
Revenues:
Rental and related revenues	$	381,785	$	326,017	$	55,768	17.1	%
Interest income on real estate loans and other	12,285		15,558		(3,273)		(21.0)	%
Total revenues	394,070		341,575		52,495		15.4	%
Expenses:
Interest expense	52,356		40,754		11,602		28.5	%
General and administrative	30,400		28,116		2,284		8.1	%
Operating expenses	128,080		103,069		25,011		24.3	%
Depreciation and amortization	142,002		114,663		27,339		23.8	%
Impairment loss	—		340		(340)		NM
Total expenses	352,838		286,942		65,896		23.0	%
Income before equity in loss of unconsolidated entities and gain on sale of investment properties, net:	41,232		54,633		(13,401)		(24.5)	%
Equity in loss of unconsolidated entities	(452)		(1,213)		761		62.7	%
Gain on sale of investment properties, net	57,375		5,111		52,264		NM
Net income	$	98,155	$	58,531	$	39,624	67.7	%

Revenues

Total revenues increased $52.5 million, or 15.4%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. An analysis of selected revenues follows.

Rental and related revenues. Rental and related revenues increased $55.8 million, or 17.1%, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. Rental and related revenues were comprised of the following based on contractual billing terms (in thousands):

	2022		2021		Change		%
Rental revenues	$	274,260	$	242,062	$	32,198	13.3	%
Expense recoveries	107,525		83,955		23,570		28.1	%
Rental and related revenues	$	381,785	$	326,017	$	55,768	17.1	%

Rental revenues increased $32.2 million, or 13.3%, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. Rental revenues increased $39.1 million from properties acquired in 2022 and 2021, including $28.5 million related to the Landmark Portfolio in 2021. This increase was partially offset by a decrease of $6.4 million related to properties sold in 2022 and 2021 and $0.5 million related to net decreases on our existing portfolio due to move outs.

Expense recoveries increased $23.6 million, or 28.1%, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. Expense recoveries increased $19.5 million from properties acquired in 2022 and 2021, including $14.6 million related to the Landmark Portfolio in 2021, and $4.5 million due to an increase in reimbursable operating expenses from our existing portfolio, explained below. These increases were partially offset by $0.2 million related to properties sold in 2022 and 2021.

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Interest income on real estate loans and other. Interest income on real estate loans and other decreased $3.3 million, or 21.0%, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. Interest income on real estate loans and other decreased $4.8 million due to lower average real estate loan balances in 2022 compared to 2021. This was offset by an increase in income due to tenant improvement and capital expenditures of $1.6 million.

Expenses

Total expenses increased by $65.9 million, or 23.0%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. An analysis of selected expenses follows.

Interest expense. Interest expense increased $11.6 million, or 28.5%, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The issuance of the 2031 Senior Notes resulted in an increase of $10.2 million, new mortgage debt resulted in an increase of $3.2 million, and increased borrowings on our credit facility resulted in an increase of $1.9 million. These increases were partially offset by the October 2021 pay off and extinguishment of our $250.0 million term loan feature of the Credit Agreement and the associated pay-fixed receive-variable rate swaps, which resulted in a decrease of $2.1 million and $1.7 million, respectively.

General and administrative. General and administrative expenses increased $2.3 million, or 8.1%, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase was primarily attributable to increased non-cash compensation of $1.6 million and higher travel and marketing costs of $0.7 million.

Operating expenses. Operating expenses increased $25.0 million, or 24.3%, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. Net operating expenses from properties acquired in 2022 and 2021 increased by $20.9 million, including $15.8 million related to the Landmark Portfolio in 2021. Operating expenses on the existing portfolio increased by $4.5 million, or 4.5% year over year, mainly due to additional utility charges of $3.0 million and building maintenance costs of $1.8 million, partially offset by insurance expense decreases of $0.3 million.

Depreciation and amortization. Depreciation and amortization increased $27.3 million, or 23.8%, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. Depreciation and amortization increased $31.4 million for properties purchased in 2022 and 2021, including $23.0 million related to the Landmark Portfolio in 2021. These increases were partially offset by $2.8 million from properties sold during 2022 and 2021 and an additional decrease of $1.2 million from our existing portfolio due to fully amortized lease intangibles.

Impairment loss. During the nine months ended September 30, 2021, the Company recorded an impairment charge of $0.3 million related to a medical office building in Traverse City, Michigan. The Company did not record any impairment loss during the nine months ended September 30, 2022.

Equity in loss of unconsolidated entities. The $0.8 million change in equity in loss of unconsolidated entities for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 is primarily due to our additional investments in the Davis Joint Venture.

Gain on sale of investment properties, net. During the nine months ended September 30, 2022 we sold five properties representing 212,295 net leasable square feet located in three states for approximately $124.7 million, realizing a net gain of approximately $57.4 million. During the nine months ended September 30, 2021, across four states we sold four properties with 157,221 net leasable square feet and three parcels of vacant land for approximately $31.7 million, recognizing a net gain of $5.1 million.

Cash Flows

Nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 (in thousands).

	2022		2021
Cash provided by operating activities	$	202,353	$	175,747
Cash used in investing activities	(41,680)		(118,965)
Cash used in financing activities	(168,037)		(53,931)
(Decrease) increase in cash and cash equivalents	$	(7,364)	$	2,851

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Cash flows from operating activities. Cash flows provided by operating activities was $202.4 million during the nine months ended September 30, 2022 compared to $175.7 million during the nine months ended September 30, 2021, representing an increase of $26.6 million. Net cash provided by operating activities increased primarily due to the impact of our 2022 and 2021 acquisitions, including the Landmark Portfolio, and contractual rent increases. These increases were partially offset by the impact of our 2022 and 2021 dispositions.

Cash flows from investing activities. Cash flows used in investing activities was $41.7 million during the nine months ended September 30, 2022 compared to cash flows used in investing activities of $119.0 million during the nine months ended September 30, 2021, representing a change of $77.3 million. The decrease in cash flows used in investing activities was primarily due to proceeds on sales of investment properties which increased cash by $92.1 million and a net decrease of $4.5 million of cash spent on the acquisitions of investment properties and unconsolidated entities. This was partially offset by an increase in net investments in real estate loan receivables of $11.7 million and cash spent on capital expenditures which increased by $7.7 million.

Cash flows from financing activities. Cash flows used in financing activities was $168.0 million during the nine months ended September 30, 2022 compared to $53.9 million during the nine months ended September 30, 2021, representing an increase of $114.1 million. The change in cash used in financing activities was primarily due to a decrease in net proceeds from the sale of common shares pursuant to the ATM Program of $103.7 million, an increase of dividends paid to shareholders of $8.4 million in 2022 compared to 2021, and $8.0 million of additional principal payments made on mortgage debt. Further, $4.4 million of additional distributions were paid to noncontrolling interests of the operating partnership and net paydowns under the credit facility increased by $5.0 million. These increases were partially offset by a decrease of $5.2 million related to debt issuance costs and a decrease in cash used in the redemption of Series A Preferred Units of $4.7 million, as no redemptions were made in 2022. Further, cash used in the redemption of OP Units decreased $3.0 million, payments made on financing leases decreased $1.7 million, and preferred distributions made to OP unit holders decreased $0.3 million.

Non-GAAP Financial Measures

This report includes Funds From Operations (FFO), Normalized FFO, Normalized Funds Available For Distribution (FAD), Net Operating Income (NOI), Cash NOI, MOB Same-Store Cash NOI, Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate (EBITDAre) and Adjusted EBITDAre, which are non-GAAP financial measures. For purposes of Item 10(e) of Regulation S-K promulgated under the Securities Act, a non-GAAP financial measure is a numerical measure of a company’s historical or future financial performance, financial position or cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable financial measure calculated and presented in accordance with GAAP in the statement of operations, balance sheet or statement of cash flows (or equivalent statements) of the company, or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable financial measure so calculated and presented. As used in this report, GAAP refers to generally accepted accounting principles in the United States of America. Pursuant to the requirements of Item 10(e) of Regulation S-K promulgated under the Securities Act, we have provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures.

FFO and Normalized FFO

We believe that information regarding FFO is helpful to shareholders and potential investors because it facilitates an understanding of the operating performance of our properties without giving effect to real estate depreciation and amortization, which assumes that the value of real estate assets diminishes ratably over time. We calculate FFO in accordance with standards established by the National Association of Real Estate Investment Trusts (Nareit). Nareit defines FFO as net income or loss (computed in accordance with GAAP) before noncontrolling interests of holders of OP units, excluding preferred distributions, gains (or losses) on sales of depreciable operating property, impairment write-downs on depreciable assets, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs). Our FFO computation includes our share of required adjustments from our unconsolidated joint ventures and may not be comparable to FFO reported by other REITs that do not compute FFO in accordance with the Nareit definition or that interpret the Nareit definition differently than we do. The GAAP measure that we believe to be most directly comparable to FFO, net income, includes depreciation and amortization expenses, gains or losses on property sales, impairments, and noncontrolling interests. In computing FFO, we eliminate these items because, in our view, they are not indicative of the results from the operations of our properties. To facilitate a clear understanding of our historical operating results, FFO should be examined in conjunction with net income (determined in accordance with GAAP) as presented in our financial statements. FFO does not represent cash generated from operating activities in accordance with GAAP, should not be considered to be an alternative to net income or loss (determined in accordance with GAAP) as a measure of our liquidity and is not indicative of funds available for our cash needs, including our ability to make cash distributions to shareholders.

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We use Normalized FFO, which excludes from FFO net change in fair value of derivative financial instruments, acceleration of deferred financing costs, net change in fair value of contingent consideration, and other normalizing items. Our Normalized FFO computation includes our share of required adjustments from our unconsolidated joint ventures and our use of the term Normalized FFO may not be comparable to that of other real estate companies as they may have different methodologies for computing this amount. Normalized FFO should not be considered as an alternative to net income or loss (computed in accordance with GAAP), as an indicator of our financial performance or of cash flow from operating activities (computed in accordance with GAAP), or as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions. Normalized FFO should be reviewed in connection with other GAAP measurements.

The following is a reconciliation from net income, the most direct financial measure calculated and presented in accordance with GAAP, to FFO and Normalized FFO (in thousands, except per share data):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net income	$	66,280	$	22,045	$	98,155	$	58,531
Earnings per share - diluted	$	0.28	$	0.10	$	0.41	$	0.26
Net income	$	66,280	$	22,045	$	98,155	$	58,531
Net income attributable to noncontrolling interests - partially owned properties	(70)		(152)		(384)		(455)
Preferred distributions	—		—		—		(13)
Depreciation and amortization expense	46,939		38,463		141,677		114,340
Depreciation and amortization expense - partially owned properties	(101)		(70)		(241)		(210)
Gain on sale of investment properties, net	(53,894)		(4,757)		(57,375)		(5,111)
Impairment loss	—		340		—		340
Proportionate share of unconsolidated joint venture adjustments	2,298		2,226		7,031		6,564
FFO applicable to common shares	$	61,452	$	58,095	$	188,863	$	173,986
Proportionate share of unconsolidated joint venture adjustments	(82)		—		(360)		—
Normalized FFO applicable to common shares	$	61,370	$	58,095	$	188,503	$	173,986
FFO per common share - diluted	$	0.26	$	0.26	$	0.79	$	0.79
Normalized FFO per common share - diluted	$	0.26	$	0.26	$	0.79	$	0.79
Weighted average common shares outstanding - diluted	239,898,462		223,992,049		239,145,383		221,399,649

Normalized Funds Available for Distribution (FAD)

We define Normalized FAD, a non-GAAP measure, which excludes from Normalized FFO non-cash share compensation expense, straight-line rent adjustments, amortization of acquired above-market or below-market leases and assumed debt, amortization of lease inducements, amortization of deferred financing costs, and loan reserve adjustments, including our share of all required adjustments from unconsolidated joint ventures. We also adjust for recurring capital expenditures related to tenant improvements and leasing commissions, and cash payments from seller master leases and rent abatement payments, including our share of all required adjustments for unconsolidated joint ventures. Other REITs or real estate companies may use different methodologies for calculating Normalized FAD, and accordingly, our computation may not be comparable to those reported by other REITs. Although our computation of Normalized FAD may not be comparable to that of other REITs, we believe Normalized FAD provides a meaningful supplemental measure of our performance due to its frequency of use by analysts, investors, and other interested parties in the evaluation of our performance as a REIT. Normalized FAD should not be considered as an alternative to net income or loss attributable to controlling interest (computed in

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accordance with GAAP) or as an indicator of our financial performance. Normalized FAD should be reviewed in connection with other GAAP measurements.

The following is a reconciliation from net income, the most direct financial measure calculated and presented in accordance with GAAP, to Normalized FAD (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net income	$	66,280	$	22,045	$	98,155	$	58,531
Normalized FFO applicable to common shares	$	61,370	$	58,095	$	188,503	$	173,986
Normalized FFO applicable to common shares	$	61,370	$	58,095	$	188,503	$	173,986
Non-cash share compensation expense	4,349		3,665		12,400		10,840
Straight-line rent adjustments	(1,478)		(2,171)		(5,359)		(7,276)
Amortization of acquired above/below-market leases/assumed debt	1,133		833		3,773		2,557
Amortization of lease inducements	225		394		675		922
Amortization of deferred financing costs	581		581		1,739		1,744
TI/LC and recurring capital expenditures	(4,129)		(6,673)		(16,660)		(17,984)
Loan reserve adjustments	152		20		159		(111)
Proportionate share of unconsolidated joint venture adjustments	(403)		(153)		(900)		(578)
Normalized FAD applicable to common shares	$	61,800	$	54,591	$	184,330	$	164,100

Net Operating Income (NOI), Cash NOI, and MOB Same-Store Cash NOI

NOI is a non-GAAP financial measure that is defined as net income or loss, computed in accordance with GAAP, generated from our total portfolio of properties and other investments before general and administrative expenses, depreciation and amortization expense, interest expense, net change in the fair value of derivative financial instruments, gain or loss on the sale of investment properties, and impairment losses, including our share of all required adjustments from our unconsolidated joint ventures. We believe that NOI provides an accurate measure of operating performance of our operating assets because NOI excludes certain items that are not associated with management of the properties. Our use of the term NOI may not be comparable to that of other real estate companies as they may have different methodologies for computing this amount.

Cash NOI is a non-GAAP financial measure which excludes from NOI straight-line rent adjustments, amortization of acquired above and below market leases, and other non-cash and normalizing items, including our share of all required adjustments from unconsolidated joint ventures. Other non-cash and normalizing items include items such as the amortization of lease inducements, loan reserve adjustments, payments received from seller master leases and rent abatements, and changes in fair value of contingent consideration. We believe that Cash NOI provides an accurate measure of the operating performance of our operating assets because it excludes certain items that are not associated with management of the properties. Additionally, we believe that Cash NOI is a widely accepted measure of comparative operating performance in the real estate community. Our use of the term Cash NOI may not be comparable to that of other real estate companies as such other companies may have different methodologies for computing this amount.

MOB Same-Store Cash NOI is a non-GAAP financial measure which excludes from Cash NOI assets not held for the entire preceding five quarters, non-MOB assets, and other normalizing items not specifically related to the same-store property portfolio. Management considers MOB Same-Store Cash NOI a supplemental measure because it allows investors, analysts, and Company management to measure unlevered property-level operating results. Our use of the term MOB Same-Store Cash NOI may not be comparable to that of other real estate companies, as such other companies may have different methodologies for computing this amount.

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The following is a reconciliation from the Trust’s net income, the most direct financial measure calculated and presented in accordance with GAAP, to NOI, Cash NOI, and MOB Same-Store Cash NOI (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net income	$	66,280	$	22,045	$	98,155	$	58,531
General and administrative	10,079		9,534		30,400		28,116
Depreciation and amortization expense	47,040		38,582		142,002		114,663
Interest expense	18,299		13,498		52,356		40,754
Gain on sale of investment properties, net	(53,894)		(4,757)		(57,375)		(5,111)
Impairment loss	—		340		—		340
Proportionate share of unconsolidated joint venture adjustments	3,463		3,653		10,289		10,725
NOI	$	91,267	$	82,895	$	275,827	$	248,018
NOI	$	91,267	$	82,895	$	275,827	$	248,018
Straight-line rent adjustments	(1,478)		(2,171)		(5,359)		(7,276)
Amortization of acquired above/below-market leases	1,133		849		3,783		2,604
Amortization of lease inducements	225		394		675		922
Loan reserve adjustments	152		20		159		(111)
Proportionate share of unconsolidated joint venture adjustments	(176)		(143)		(346)		(459)
Cash NOI	$	91,123	$	81,844	$	274,739	$	243,698
Cash NOI	$	91,123	$	81,844
Assets not held for all periods or held for sale	(12,785)		(3,304)
Hospital Cash NOI	(2,775)		(2,519)
Lease termination fees	—		(158)
Interest income on real estate loans	(2,517)		(3,797)
Joint venture and other income	(3,595)		(3,350)
MOB Same-Store Cash NOI	$	69,451	$	68,716

Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate (EBITDAre) and Adjusted EBITDAre

We calculate EBITDAre in accordance with standards established by Nareit and define EBITDAre as net income or loss computed in accordance with GAAP plus depreciation and amortization, interest expense, gain or loss on the sale of investment properties, and impairment loss, including our share of all required adjustments from unconsolidated joint ventures. We define Adjusted EBITDAre, which excludes from EBITDAre non-cash share compensation expense, non-cash changes in fair value, pursuit costs, non-cash intangible amortization, the pro forma impact of investment activity, and other normalizing items. We consider EBITDAre and Adjusted EBITDAre important measures because they provide additional information to allow management, investors, and our current and potential creditors to evaluate and compare our core operating results and our ability to service debt.

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The following is a reconciliation from the Trust’s net income, the most direct financial measure calculated and presented in accordance with GAAP, to EBITDAre and Adjusted EBITDAre (in thousands):

	Three Months Ended September 30,
	2022		2021
Net income	$	66,280	$	22,045
Depreciation and amortization expense	47,040		38,582
Interest expense	18,299		13,498
Gain on sale of investment properties, net	(53,894)		(4,757)
Impairment loss	—		340
Proportionate share of unconsolidated joint venture adjustments	3,545		3,627
EBITDAre	$	81,270	$	73,335
Non-cash share compensation expense	4,349		3,665
Pursuit costs	149		75
Non-cash intangible amortization	1,358		1,227
Proportionate share of unconsolidated joint venture adjustments	(82)		—
Pro forma adjustments for investment activity	871		585
Adjusted EBITDAre	$	87,915	$	78,887

Liquidity and Capital Resources

In March 2020, the Securities and Exchange Commission (SEC) adopted amendments to Rule 3-10 of Regulation S-X and created Rule 13-01 to simplify disclosure requirements related to certain registered securities. The rule is effective January 4, 2021 but earlier compliance is permitted. As a result of the amendments to Rule 3-10 of Regulation S-X, subsidiary issuers of obligations guaranteed by the parent are not required to provide separate financial statements, provided that the subsidiary obligor is consolidated into the parent company’s consolidated financial statements, the parent guarantee is “full and unconditional” and the alternative disclosure required by Rule 13-01 is provided, which includes narrative disclosure and summarized financial information. Accordingly, separate consolidated financial statements of the Operating Partnership have not been presented. Furthermore, as permitted under Rule 13-01(a)(4)(vi), the Company has excluded the summarized financial information for the Operating Partnership as the assets, liabilities, and results of operations of the Company and the Operating Partnership are not materially different than the corresponding amounts presented in the consolidated financial statements of the Company, and management believes such summarized financial information would be repetitive and not provide incremental value to investors.

Our short-term liquidity requirements consist primarily of operating and interest expenses and other expenditures directly associated with our properties, including:

•property expenses;

•interest expense and scheduled principal payments on outstanding indebtedness;

•general and administrative expenses; and

•capital expenditures for tenant improvements and leasing commissions.

In addition, we will require funds for future distributions expected to be paid to our common shareholders and OP Unit holders in our Operating Partnership.

As of September 30, 2022, we had a total of $2.5 million of cash and cash equivalents and $738.0 million of near-term availability on our unsecured revolving credit facility. Our primary sources of cash include rent we collect from our tenants, borrowings under our unsecured credit facility, and financings of debt and equity securities. We believe that our existing cash and cash equivalents, cash flow from operating activities, and borrowings available under our unsecured revolving credit facility will be adequate to fund any existing contractual obligations to purchase properties and other obligations through the next year. However, because of the 90% distribution requirement under the REIT tax rules under the Code, we may not be able to fund all of our future capital needs from cash retained from operations, including capital needed to make investments and to satisfy or refinance maturing obligations. As a result, we expect to rely upon external sources of capital, including debt and equity financing, to fund future capital needs. If we are unable to obtain needed capital on satisfactory terms or at all, we may not be able to make the investments needed to expand our business or to meet our obligations and commitments as they mature.

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We will rely upon external sources of capital to fund future capital needs, and, if we encounter difficulty in obtaining such capital, we may not be able to make future acquisitions necessary to grow our business or meet maturing obligations.

Our long-term liquidity needs consist primarily of funds necessary to pay for acquisitions, recurring and non-recurring capital expenditures, and scheduled debt maturities. We expect to satisfy our long-term liquidity needs through cash flow from operations, unsecured borrowings, issuances of equity and debt securities, proceeds from select property dispositions and joint venture transactions, and, in connection with acquisitions of additional properties, the issuance of OP Units of our Operating Partnership.

Our ability to access capital in a timely and cost-effective manner is essential to the success of our business strategy as it affects our ability to satisfy existing obligations, including repayment of maturing indebtedness, and to make future investments and acquisitions. Factors such as general market conditions, interest rates, credit ratings on our debt and equity securities, expectations of our potential future earnings and cash distributions, and the market price of our common shares, each of which are beyond our control and vary or fluctuate over time, all impact our access to and cost of capital. In particular, to the extent interest rates continue to rise, we may experience a decline in the trading price of our common shares, which may impact our decision to conduct equity offerings for capital raising purposes. We will likely also experience higher borrowing costs as interest rates rise, which may also impact our decisions to incur additional indebtedness, or to engage in transactions for which we may need to fund through borrowing. We expect to continue to utilize equity and debt financings to support our future growth and investment activity.

We also continuously evaluate opportunities to finance future investments. New investments are generally funded from temporary borrowings under our primary unsecured credit facility and the proceeds from financing transactions such as those discussed above. Our investments generate cash from net operating income and principal payments on loans receivable. Permanent financing for future investments, which generally replaces funds drawn under our primary unsecured credit facility, has historically been provided through a combination of the issuance of debt and equity securities and the incurrence or assumption of secured debt.

We intend to invest in additional properties as suitable opportunities arise and adequate sources of financing are available. We are currently evaluating additional potential investments consistent with the normal course of our business. There can be no assurance as to whether or when any portion of these investments will be completed. Our ability to complete investments is subject to a number of risks and variables, including our ability to negotiate mutually agreeable terms with sellers and our ability to finance the investment. We may not be successful in identifying and consummating suitable acquisitions or investment opportunities, which may impede our growth and negatively affect our results of operations and may result in the use of a significant amount of management’s resources. We expect that future investments in properties will depend on and will be financed by, in whole or in part, our existing cash, borrowings, including under our unsecured revolving credit facility, or the proceeds from additional issuances of equity or debt securities.

We currently do not expect to sell any of our properties to meet our liquidity needs, although we may do so in the future. 

We currently are in compliance with all debt covenants on our outstanding indebtedness.

Credit Facility

On September 24, 2021, the Operating Partnership, as borrower, and the Trust, as guarantor, executed the Credit Agreement which extended the maturity date of the revolving credit facility under the Credit Agreement to September 24, 2025 and reduced the interest rate margin applicable to borrowings. The Credit Agreement includes an unsecured revolving credit facility of $1.0 billion and contains a term loan feature of $250 million, bringing total borrowing capacity to $1.3 billion. The Credit Agreement also includes a swingline loan commitment for up to 10% of the maximum principal amount and provides an accordion feature allowing the Trust to increase borrowing capacity by up to an additional $500 million, subject to customary terms and conditions, resulting in a maximum borrowing capacity of $1.75 billion. The revolving credit facility under the Credit Agreement also includes two six-month extension options.

On October 13, 2021, the Company used the proceeds from the 2031 Senior Notes to pay off a $250.0 million term loan feature of the Credit Agreement. The Operating Partnership simultaneously terminated the existing pay-fixed receive-variable rate swaps associated with the full term loan borrowing of $250.0 million. As part of the termination, the Company made total cash payments of $3.3 million to the counterparties of the swap agreements. As defined by the Credit Agreement, the term loan feature is no longer available to the Company.

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As of September 30, 2022, the Company had $262.0 million of borrowings outstanding under its unsecured revolving credit facility. As defined by the Credit Agreement, $738.0 million is available to borrow without adding additional properties to the unencumbered borrowing base of assets. See Note 6 (Debt) to our accompanying consolidated financial statements for a further discussion of our credit facility.

Senior Notes

As of September 30, 2022, we had $1.5 billion aggregate principal amount of senior notes issued and outstanding by the Operating Partnership, comprised of $15.0 million maturing in 2023, $25.0 million maturing in 2025, $70.0 million maturing in 2026, $425.0 million maturing in 2027, $395.0 million maturing in 2028, and $545.0 million maturing in 2031. See Note 6 (Debt) to our accompanying consolidated financial statements for a further discussion of our senior notes.

ATM Program

In May 2021, the Company entered into the Sales Agreement, pursuant to which the Trust may issue and sell, from time to time, its common shares having an aggregate offering price of up to $500 million. In accordance with the Sales Agreement, the Trust may offer and sell its common shares through the Agents, from time to time, by any method deemed to be an “at the market offering” as defined in Rule 415 under the Securities Act of 1933, as amended, which includes sales made directly on the New York Stock Exchange or other existing trading market, or sales made to or through a market maker.

During the quarters ended March 31, 2022, June 30, 2022, and September 30, 2022, the Trust issued and sold common shares through the ATM Program as follows (net proceeds in thousands):

	Common shares sold	Weighted average price		Net proceeds
Quarter ended March 31, 2022	259,977	$	18.93	$	4,871
Quarter ended June 30, 2022	977,800	18.61		18,020
Quarter ended September 30, 2022	440,400	18.15		7,913
Year to date	1,678,177	$	18.54	$	30,804

As of September 30, 2022, the Trust has $300.1 million of common shares remaining available under the ATM Program.

Dividend Reinvestment and Share Purchase Plan

In December 2014, the Company adopted a Dividend Reinvestment and Share Purchase Plan (“DRIP”). Under the DRIP:

•existing shareholders may purchase additional common shares by reinvesting all or a portion of the dividends paid on their common shares and by making optional cash payments of not less than $50 and up to a maximum of $10,000 per month;

•new investors may join the DRIP by making an initial investment of not less than $1,000 and up to a maximum of $10,000; and

•once enrolled in the DRIP, participants may authorize electronic deductions from their bank account for optional cash payments to purchase additional shares.

The DRIP is administered by our transfer agent, Computershare Trust Company, N.A. Our common shares sold under the DRIP are newly issued or purchased in the open market, as further described in the DRIP. As of September 30, 2022, the Company had issued 202,460 common shares under the DRIP since its inception.

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Critical Accounting Policies

Our consolidated financial statements included in Part I, Item 1 of this report are prepared in conformity with GAAP for interim financial information set forth in the ASC, as published by the Financial Accounting Standards Board, which require us to make estimates and assumptions regarding future events that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. We base these estimates on our experience and assumptions we believe to be reasonable under the circumstances. However, if our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, we may have applied a different accounting treatment, resulting in a different presentation of our financial statements. We periodically reevaluate our estimates and assumptions, and in the event they prove to be different from actual results, we make adjustments in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. Please refer to our 2021 Annual Report for further information regarding the critical accounting policies that affect our more significant estimates and judgments used in the preparation of our consolidated financial statements included in Part I, Item 1 of this report.

REIT Qualification Requirements

We are subject to a number of operational and organizational requirements necessary to qualify and maintain our qualification as a REIT. If we fail to qualify as a REIT or fail to remain qualified as a REIT in any taxable year, our income would be subject to federal income tax at regular corporate rates and potentially increased state and local taxes and we could incur substantial tax liabilities which could have an adverse impact upon our results of operations, liquidity, and distributions to our shareholders.

Off-Balance Sheet Arrangements

As of September 30, 2022, we have investments in two unconsolidated joint ventures with ownership interests of 49.0% and 12.3%, respectively. The aggregate carrying amount of debt, including both our and our partners’ share, incurred by these ventures was approximately $795.4 million (of which our proportionate share is approximately $144.2 million). See Note 2 (Summary of Significant Accounting Policies) of Part II, Item 8 (Financial Statements and Supplementary Data) of our 2021 Annual Report for the fiscal year ended December 31, 2021 for additional information. We have no other off-balance sheet arrangements that we expect would materially affect our liquidity and capital resources.

Item 3.                                 Quantitative and Qualitative Disclosures about Market Risk

Our future income, cash flows, and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. We use certain derivative financial instruments to manage, or hedge, interest rate risks related to our borrowings. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based upon their credit rating and other factors. Our derivative instruments consist of one interest rate swap. See Note 7 (Derivatives) in Part I, Item I of this report and Note 2 (Summary of Significant Accounting Policies) of Part II, Item 8 (Financial Statements and Supplementary Data) of our 2021 Annual Report for further detail on our interest rate swap.

Interest rate risk amounts are our management’s estimates and were determined by considering the effect of hypothetical interest rates on our consolidated financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur in that environment. Further, in the event of a change of that magnitude, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.

Fixed Interest Rate Debt

As of September 30, 2022, our consolidated fixed interest rate debt totaled $1.5 billion, which represented 78.8% of our total consolidated debt, excluding the impact of the interest rate swap. We entered into a pay-fixed receive-variable rate swap for $36.1 million of our mortgage debt, fixing the LIBOR component of the borrowing rate to 1.43%, for an all-in fixed rate as of September 30, 2022 of 3.33%. Both the borrowing and pay-fixed receive-variable swap have a maturity date of October 31, 2024.

Assuming the effects of our interest rate swap agreement, our fixed interest rate debt would represent 80.7% of our total consolidated debt. Interest rate fluctuations on our fixed interest rate debt will generally not affect our future earnings or

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cash flows unless such instruments mature or are otherwise terminated. However, interest rate changes could affect the fair value of our fixed interest rate debt.

As of September 30, 2022, the fair value and the carrying value of our consolidated fixed interest rate debt were approximately $1.3 billion and $1.5 billion, respectively. The fair value estimate of our fixed interest rate debt was estimated using a discounted cash flow analysis utilizing rates we would expect to pay for debt of a similar type and remaining maturity if the loans were originated on September 30, 2022. As we expect to hold our fixed interest rate debt instruments to maturity, based on the underlying structure of the debt instrument, and the amounts due under such instruments are limited to the outstanding principal balance and any accrued and unpaid interest, we do not expect that market fluctuations in interest rates, and the resulting change in fair value of our fixed interest rate debt instruments, would have a significant impact on our operating cash flows.

Variable Interest Rate Debt

As of September 30, 2022, our consolidated variable interest rate debt totaled $403.3 million, which represented 21.2% of our total consolidated debt. Assuming the effects of our interest rate swap agreement, our variable interest rate debt would represent 19.3% of our total consolidated debt. Interest rate changes on our variable rate debt could impact our future earnings and cash flows but would not significantly affect the fair value of such debt. As of September 30, 2022, we were exposed to market risks related to fluctuations in interest rates on $367.3 million of consolidated borrowings. Assuming no increase in the amount of our variable rate debt, if LIBOR and SOFR were to change by 100 basis points, interest expense on our variable rate debt as of September 30, 2022 would change by approximately $2.7 million and $1.0 million annually, respectively.

Derivative Instruments

As of September 30, 2022, we had one outstanding interest rate swap that was designated as a cash flow hedge of interest rate risk, with a total notional amount of $36.1 million. See Note 7 (Derivatives) within our consolidated financial statements for further detail on our interest rate swap. We are exposed to credit risk of the counterparty to our interest rate swap agreement in the event of non-performance under the terms of the agreements. If we were not able to replace the swap in the event of non-performance by the counterparty, we would be subject to variability of the interest rate on the amount outstanding under our debt that is fixed through the use of the swap.

Indebtedness

As of September 30, 2022, we had total consolidated indebtedness of approximately $1.9 billion. The weighted average interest rate on our consolidated indebtedness was 3.75% (based on the 30-day LIBOR rate of 2.92% and a SOFR rate of 2.98% as of September 30, 2022). As of September 30, 2022, we had approximately $367.3 million, or approximately 19.3%, of our outstanding long-term debt exposed to fluctuations in short-term interest rates. See Note 6 (Debt) to our consolidated financial statements included in Part I, Item 1 to this report for a summary of our indebtedness as of September 30, 2022.

Item 4.                                 Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Trust’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Trust’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based on such evaluation, the Trust’s Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2022, the Trust’s disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information it is required to disclose in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to the Trust’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

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Changes in Internal Control over Financial Reporting

There have been no changes in the Trust’s system of internal control over financial reporting during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Trust’s internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures and the Trust’s internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and the Trust’s internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

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PART II.       Other Information

Item 1.                                 Legal Proceedings

From time to time, we are party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. We are not currently a party, as plaintiff or defendant, to any legal proceedings which, individually or in the aggregate, would be expected to have a material effect on our business, financial condition, or results of operations if determined adversely to us.

Item 1A.                       Risk Factors

Information on risk factors can be found in Part I, Item 1A (Risk Factors) of our 2021 Annual Report. There have been no material changes from the risk factors previously disclosed in our 2021 Annual Report.

Item 2.                       Unregistered Sales of Equity Securities and Use of Proceeds

Recent Sales of Unregistered Securities

From time to time the Operating Partnership issues OP Units to the Trust, as required by the Partnership Agreement, to reflect additional issuances of common shares by the Trust and to preserve equitable ownership ratios.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table sets forth information relating to repurchases of our common shares of beneficial interest and OP Units during the three months ended September 30, 2022:

ISSUER PURCHASES OF EQUITY SECURITIES

Period	(a) Total Number of Shares (or Units) Purchased		(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
July 1, 2022 - July 31, 2022	123,903	(1)	$	17.26	N/A	N/A
August 1, 2022 - August 31, 2022	—		—		N/A	N/A
September 1, 2022 - September 30, 2022	—		—		N/A	N/A
Total	123,903		$	17.26	—	—

(1)Represents OP Units redeemed by holders in exchange for cash.

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Item 6.                                 Exhibits

Exhibit No.	Description
22.1	List of Subsidiary Issuers and Guaranteed Securities**
31.1	Certification of John T. Thomas, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Physicians Realty Trust**
31.2	Certification of Jeffrey N. Theiler, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Physicians Realty Trust**
32.1	Certification of John T. Thomas and Jeffrey N. Theiler, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) for Physicians Realty Trust**
101.INS	This instance document does not appear in the interactive data file because of XBRL tags are embedded within the inline XBRL document.
101.SCH	Inline XBRL Extension Schema Document (+)
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document (+)
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document (+)
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document (+)
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document (+)
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

**    Filed herewith

(+) Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement for purposes of Section 11 or 12 of the Securities Act, is deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise is not subject to liability under these sections.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PHYSICIANS REALTY TRUST
Date: November 4, 2022	/s/ John T. Thomas
	John T. Thomas
	President and Chief Executive Officer
	(Principal Executive Officer)
Date: November 4, 2022	/s/ Jeffrey N. Theiler
	Jeffrey N. Theiler
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)

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