10-K 1 hr-20171231singlesource10k.htm 10-K Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________ 
Form 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended: December 31, 2017
OR
¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period             to
Commission File Number: 001-11852
__________________________________________________ 
HEALTHCARE REALTY TRUST INCORPORATED
(Exact name of Registrant as specified in its charter)
Maryland
 
62-1507028
(State or other jurisdiction of
Incorporation or organization)
 
(I.R.S. Employer
Identification No.)
3310 West End Avenue
Suite 700
Nashville, Tennessee 37203
(Address of principal executive offices)
(615) 269-8175
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common stock, $0.01 par value per share
 
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
(Title of Class)
__________________________________________________ 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ý    No    o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes    o    No    ý
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  ý    No  o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ý    No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b -2 of the Exchange Act. (Check one):
 
 
Large accelerated filer
 
ý
 
Accelerated filer
 
o
 
 
 
Non-accelerated filer
 
o
(Do not check if a smaller reporting company)
 
 
 
 
 
 
 
 
 
 
 
 
 
Smaller reporting company
 
o
 
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes  o    No  ý
The aggregate market value of the shares of common stock of the Registrant (based upon the closing price of these shares on the New York Stock Exchange on June 30, 2017) held by non-affiliates on June 30, 2017 was $3,878,376,057.
As of January 26, 2018, there were 125,144,327 shares of the Registrant’s common stock outstanding.
________________________________ 
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 8, 2018 are incorporated by reference into Part III of this Report.
 



HEALTHCARE REALTY TRUST INCORPORATED
FORM 10-K
December 31, 2017

TABLE OF CONTENTS

 
  
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 



PART I

Item 1. Business
Overview
Healthcare Realty Trust Incorporated (“Healthcare Realty” or the “Company”) is a self-managed and self-administered real estate investment trust (“REIT”) that owns, leases, manages, acquires, finances, develops and redevelops income-producing real estate properties associated primarily with the delivery of outpatient healthcare services throughout the United States. The Company was incorporated in Maryland in 1992 and listed on the New York Stock Exchange in 1993.
The Company operates so as to qualify as a REIT for federal income tax purposes. As a REIT, the Company is not subject to corporate federal income tax with respect to taxable income distributed to its stockholders. See “Risk Factors” in Item 1A for a discussion of risks associated with qualifying as a REIT.
Real Estate Properties
The Company had gross investments of approximately $3.8 billion in 201 real estate properties, construction in progress, land held for development and corporate property at December 31, 2017. The Company provided property management services for 160 healthcare-related properties nationwide, totaling approximately 11.5 million square feet as of December 31, 2017. The Company’s real estate property investments by geographic area are detailed in Note 2 to the Consolidated Financial Statements. The following table details the Company's owned properties by facility type as of December 31, 2017:
 
Gross Investment

 
Square Feet

 
Percentage of
Square Feet

 
December 31, 2017
 
December 31, 2016
(Dollars and square feet in thousands)
 
 
 
Number of Properties

 
Occupancy (1)

 
Number of Properties

 
Occupancy (1)

Medical office/outpatient
$
3,486,478

 
13,741

 
94.0
%
 
188

 
87.3
%
 
182

 
87.4
%
Inpatient
254,179

 
529

 
3.6
%
 
5

 
100.0
%
 
10

 
100.0
%
Other
66,797

 
363

 
2.4
%
 
8

 
98.4
%
 
10

 
83.1
%
Sub-Total
3,807,454

 
14,633

 
100.0
%
 
201

 
88.1
%
 
202

 
87.9
%
Construction in progress
5,458

 
 
 
 
 
 
 
 
 
 
 
 
Land held for development
20,123

 
 
 
 
 
 
 
 
 
 
 
 
Corporate property
5,603

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
3,838,638

 


 
 
 


 
 
 
 
 
 
______
(1)
The occupancy columns represent the percentage of total rentable square feet leased (including month-to-month and holdover leases), excluding properties classified as held for sale (eight properties as of December 31, 2017 and two properties as of December 31, 2016).
Revenue Concentrations
The Company’s real estate portfolio is leased to a diverse tenant base. For the year ended December 31, 2017, the Company did not have any tenants that accounted for 10% or more of the Company’s consolidated revenues, including revenues from discontinued operations. The largest revenue concentration is with Baylor Scott & White Health and its affiliates, which accounted for 9.7% of the Company's consolidated revenues, comprising 158 leases spread over 20 buildings.

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Expiring Leases
As of December 31, 2017, the weighted average remaining years to maturity pursuant to the Company’s leases were approximately 4.1 years, with expirations through 2036. The table below details the Company’s lease maturities as of December 31, 2017, excluding eight properties classified as held for sale.
Expiration Year
 
Number of Leases

 
Leased Square Feet

 
Percentage of Leased Square Feet

2018 (1)
 
623

 
2,039,826

 
15.8
%
2019
 
526

 
2,327,477

 
18.1
%
2020
 
449

 
1,885,019

 
14.6
%
2021
 
317

 
1,171,015

 
9.1
%
2022
 
284

 
1,252,594

 
9.7
%
2023
 
154

 
801,219

 
6.2
%
2024
 
147

 
824,574

 
6.4
%
2025
 
75

 
650,673

 
5.1
%
2026
 
65

 
222,474

 
1.7
%
2027
 
61

 
642,254

 
5.0
%
Thereafter
 
78

 
1,070,766

 
8.3
%
 
 
2,779

 
12,887,891

 
100.0
%
______ 
(1)
Includes 52 leases totaling 140,172 square feet that expired prior to December 31, 2017 and are currently on month-to-month terms.

See "Trends and Matters Impacting Operating Results" as part of Management's Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of this report for additional information regarding the Company's leases and leasing efforts.
Liquidity
The Company believes that its liquidity and sources of capital are adequate to satisfy its cash requirements. The Company expects to meet its liquidity needs through cash on hand, cash flows from operations, property dispositions, equity and debt issuances in the public or private markets and borrowings under commercial credit facilities.
Business Strategy
The Company owns and operates properties that facilitate the delivery of healthcare in primarily outpatient settings. To execute its strategy, the Company engages in a broad spectrum of integrated services including leasing, management, acquisition, financing, development and redevelopment of such properties. The Company seeks to generate stable, growing income and lower the long-term risk profile of its portfolio of properties by focusing on facilities located on or near the campuses of acute care hospitals associated with leading health systems. The Company seeks to reduce financial and operational risk by owning properties in diverse geographic locations with a broad tenant mix that includes over 30 physician specialties, as well as surgery, imaging, cancer and diagnostic centers.
2017 Investment Activity
The Company acquired 15 medical office buildings and increased its ownership interest in an existing medical office building during 2017 for a total purchase price of $327.2 million. This includes the assumption of mortgage notes payable of $45.8 million and the acquisition of equity interests in limited liability companies that own two parking garages in Atlanta, Georgia. The weighted average capitalization rate for these investments was 5.4%. The Company calculates the capitalization rate for an acquisition as the forecasted first year net operating income divided by the purchase price plus acquisition costs and expected first year capital additions.
The Company disposed of 10 properties during 2017 for a total sales price of $122.7 million, including $84.0 million for four inpatient rehabilitation facilities. The weighted average capitalization rate for these 10 properties was 7.0%. The Company calculates the capitalization rate for dispositions as the next 12 months forecasted net operating income divided by the sales price.

In 2017, the Company funded $32.3 million toward development and redevelopment of properties, with one redevelopment and one development project underway at December 31, 2017.

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See the Company's discussion regarding the 2017 acquisitions and dispositions activity in Note 4 to the Consolidated Financial Statements and development activity in Note 15 to the Consolidated Financial Statements. Also, please refer to the Company's discussion in "Trends and Matters Impacting Operating Results" as part of Management's Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of this report.
Competition
The Company competes for the acquisition and development of real estate properties with private investors, healthcare providers, other REITs, real estate partnerships and financial institutions, among others. The business of acquiring and developing new healthcare facilities is highly competitive and is subject to price, construction and operating costs, and other competitive pressures. Some of the Company's competitors may have lower costs of capital.
The financial performance of all of the Company’s properties is subject to competition from similar properties. The extent to which the Company’s properties are utilized depends upon several factors, including the number of physicians using or referring patients to an associated healthcare facility, healthcare employment, competitive systems of healthcare delivery, and the area’s population, size and composition. Private, federal and state health insurance programs and other laws and regulations may also have an effect on the utilization of the properties. The Company’s properties operate in a competitive environment, and patients and referral sources, including physicians, may change their preferences for a healthcare facility from time to time.
Government Regulation
The facilities owned by the Company are utilized by medical tenants which are required to comply with extensive regulation at the federal, state and local levels, including the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the "Affordable Care Act") and laws intended to combat fraud and waste such as the Anti-Kickback Statute, Stark Law, False Claims Act and Health Insurance Portability and Accountability Act of 1996. These laws and regulations establish, among other things, requirements for state licensure and criteria for medical tenants to participate in government-sponsored reimbursement programs, including the Medicare and Medicaid programs. The Company's leases generally require the tenant to comply with all applicable laws relating to the tenant's use and occupation of the leased premises. Although lease payments to the Company are not directly affected by these laws and regulations, changes in these programs or the loss by a tenant of its license or ability to participate in government-sponsored reimbursement programs could have a material adverse effect on the tenant's ability to make lease payments to the Company.
The Medicare and Medicaid programs are highly regulated and subject to frequent evaluation and change. Government healthcare spending has increased over time; however, changes from year to year in reimbursement methodology, rates and other regulatory requirements may cause the profitability of providing care to Medicare and Medicaid patients to decline, which could adversely affect tenants' ability to make lease payments to the Company.
The Affordable Care Act was intended to provide for comprehensive reform of the United States' healthcare system and extend health insurance benefits to the uninsured population, with a mandate for individuals to purchase health coverage, and the potential to alleviate high uncompensated care expense to healthcare providers. However, the law also increased regulatory scrutiny of providers and insurers by federal and state administrative authorities; lowered annual increases in Medicare payment rates; and implemented cost-saving measures and shared risk-and-reward payment models to promote value and savings, rather than payment based solely on volume of services. These initiatives may slow the growth of healthcare spending over time, but also require providers to expand access and quality of care, presenting the industry and its individual participants with uncertainty and greater financial risk.
In 2017, the Affordable Care Act was subject to numerous legal and legislative challenges. While efforts in Congress to repeal the law were unsuccessful, President Trump's administration moved forward with an agenda to decrease the law's regulations, eliminate the individual insurance mandate penalty starting in 2019, end cost-sharing reduction payments to insurers for lower-income federal exchange enrollees, and increase states' flexibility to offer short-term, basic insurance plans. These initiatives could affect the market for individual health insurance and, consequently, the demand for healthcare services. The Company cannot predict the degree to which any changes may affect indirectly the economic performance of the Company, or its tenants, positively or negatively.
The Centers for Medicare and Medicaid Services ("CMS") continued to monitor physician Medicare rates in 2017 for reimbursement “site-neutrality,” or equalizing Medicare rates across different facility-type settings. Section 603 of the Bipartisan Budget Act of 2015 lowered Medicare rates effective January 1, 2017 for services provided in off-campus, provider-based outpatient departments to the same level of rates for physician-office settings for those facilities not grandfathered-in under the current Medicare rates as of the law's date of enactment, November 2, 2015. While these changes are expected to lessen reimbursement disparity between off-campus medical office and outpatient facilities, the Company’s medical office

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buildings that are located on hospital campuses could become more valuable as hospital tenants will keep their higher Medicare rates for on-campus outpatient services. However, the Company cannot predict the amount of benefit from these measures or if other federal health policy or regulation will ultimately require cuts to reimbursement rates for services provided in other facility-type settings. The Company cannot predict the degree to which these changes, or changes to federal healthcare programs in general, may affect the economic performance of some or all of the Company's tenants, positively or negatively.
In 2018, physicians must begin reporting patient data on quality and performance measures that will affect their Medicare payments for the year 2020. Implementation of the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”), unless amended in future legislation, will eventually replace the traditional fee-for-service payment model for physicians with a new value-based payment initiative. The CMS exempted approximately two-thirds of physician practices from MACRA compliance in 2018, citing high costs of implementation with minimal yield in savings, especially for smaller practices. MACRA compliance, and the ongoing debate over the most effective payment system to use to promote value-based reimbursement, present the industry and its individual participants with uncertainty and financial risk. The Company cannot predict the degree to which any such changes may affect the economic performance of the Company's tenants or indirectly the Company.
Legislative Developments
Each year, legislative proposals for health policy are introduced in Congress and state legislatures, and regulatory changes are enacted by government agencies. These proposals, individually or in the aggregate, could significantly change the delivery of healthcare services, either nationally or at the state level, if implemented. Examples of significant legislation or regulatory action recently enacted or in the process of implementation include:
the legislation informally known as the Tax Cuts and Jobs Act of 2017, signed into law at the end of the year, affects healthcare providers and health systems in a variety of ways, positively and negatively, including by limiting their ability to deduct interest on debt, denying deductions for and imposing an excise tax on the compensation in excess of $1 million of the five most highly-compensated employees of health systems, and eliminating, in 2019, the tax penalty for the Affordable Care Act’s individual health insurance mandate;
the expansion of Medicaid benefits and the implementation of health insurance exchanges under the Affordable Care Act, whether run by the state or by the federal government, whereby individuals and small businesses purchase health insurance, including government-funded plans, many assisted by federal subsidies that are subject to ongoing legal and legislative challenges;
quality control, cost containment, and value-based payment system reforms for Medicaid and Medicare, such as expansion of pay-for-performance criteria, bundled provider payments, accountable care organizations, increased patient cost-sharing, geographic payment variations, comparative effectiveness research, and lower payments for hospital readmissions;
implementation of MACRA, which, if not amended in future legislation, will eventually replace the traditional fee-for-service payment model for physicians with a new value-based payment initiative; the CMS exempted approximately two-thirds of physician practices from MACRA compliance in 2018;
equalization of Medicare payment rates across different facility-type settings; Section 603 of the Bipartisan Budget Act of 2015 lowered Medicare payment rates, effective January 1, 2017 for services provided in off-campus, provider-based outpatient departments to the same level of rates for physician-office settings for those facilities not grandfathered under the current Medicare rates as of the law’s date of enactment, November 2, 2015;
the continued adoption by providers of federal standards for the meaningful-use of electronic health records;
anti-trust scrutiny of health insurance company mergers; and
consideration of significant cost-saving overhauls of Medicare and Medicaid, including capped federal Medicaid payments to states, premium-support models to provide for a fixed amount of Medicare benefits per enrollee, and an increase in the eligibility age for Medicare.
The Company cannot predict whether any proposals will be fully implemented, adopted, repealed, or amended, or what effect, whether positive or negative, such proposals might have on the Company's business.

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Environmental Matters
Under various federal, state and local environmental laws, ordinances and regulations, an owner of real property (such as the Company) may be liable for the costs of removal or remediation of certain hazardous or toxic substances at, under, or disposed of in connection with such property, as well as certain other potential costs (including government fines and injuries to persons and adjacent property) relating to hazardous or toxic substances. Most, if not all, of these laws, ordinances and regulations contain stringent enforcement provisions including, but not limited to, the authority to impose substantial administrative, civil, and criminal fines and penalties upon violators. Such laws often impose liability, without regard to whether the owner knew of, or was responsible for, the presence or disposal of such substances, and may be imposed on the owner in connection with the activities of a tenant or operator of the property. The cost of any required remediation, removal, fines or personal or property damages and the owner’s liability therefore could exceed the value of the property and/or the aggregate assets of the owner. In addition, the presence of such substances, or the failure to properly dispose of or remediate such substances, may adversely affect the owner’s ability to sell or lease such property or to borrow using such property as collateral. A property can also be negatively impacted either through physical contamination, or by virtue of an adverse effect on value, from contamination that has or may have emanated from other properties.
Operations of the properties owned, developed or managed by the Company are and will continue to be subject to numerous federal, state, and local environmental laws, ordinances and regulations, including those relating to the following: the generation, segregation, handling, packaging and disposal of medical wastes; air quality requirements related to operations of generators, incineration devices, or sterilization equipment; facility siting and construction; disposal of non-medical wastes and ash from incinerators; and underground storage tanks. Certain properties owned, developed or managed by the Company contain, and others may contain or at one time may have contained, underground storage tanks that are or were used to store waste oils, petroleum products or other hazardous substances. Such underground storage tanks can be the source of releases of hazardous or toxic materials. Operations of nuclear medicine departments at some properties also involve the use and handling, and subsequent disposal of, radioactive isotopes and similar materials, activities which are closely regulated by the Nuclear Regulatory Commission and state regulatory agencies. In addition, several of the Company's properties were built during the period that asbestos was commonly used in building construction and other such facilities may be acquired by the Company in the future. The presence of such materials could result in significant costs in the event that any asbestos-containing materials requiring immediate removal and/or encapsulation are located in or on any facilities or in the event of any future renovation activities.
The Company has had environmental site assessments conducted on substantially all of the properties that it currently owns. These site assessments are limited in scope and provide only an evaluation of potential environmental conditions associated with the property, not compliance assessments of ongoing operations. While it is the Company’s policy to seek indemnification from tenants relating to environmental liabilities or conditions, even where leases do contain such provisions, there can be no assurance that the tenant will be able to fulfill its indemnification obligations. In addition, the terms of the Company’s leases or financial support agreements do not give the Company control over the operational activities of its tenants or healthcare operators, nor will the Company monitor the tenants or healthcare operators with respect to environmental matters.
Insurance
The Company carries comprehensive liability insurance and property insurance covering its owned and managed properties, including those held under long-term ground leases. In addition, tenants under long-term single-tenant net leases are required to carry property insurance covering the Company’s interest in the buildings.
Employees
At December 31, 2017, the Company employed 273 people. The employees are not members of any labor union, and the Company considers its relations with its employees to be excellent.
Available Information
The Company makes available to the public free of charge through its Internet website the Company’s Proxy Statement, Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the Company electronically files such reports with, or furnishes such reports to, the Securities and Exchange Commission ("SEC"). The Company’s Internet website address is www.healthcarerealty.com.
The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room located at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains electronic versions of the Company’s reports on its website at www.sec.gov.

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Corporate Governance Principles
The Company has adopted Corporate Governance Principles relating to the conduct and operations of the Board of Directors. The Corporate Governance Principles are posted on the Company’s website (www.healthcarerealty.com) and are available in print to any stockholder who requests a copy.
Committee Charters
The Board of Directors has an Audit Committee, Compensation Committee, Nominating and Corporate Governance Committee and Executive Committee. The Board of Directors has adopted written charters for each committee, except for the Executive Committee, which are posted on the Company’s website (www.healthcarerealty.com) and are available in print to any stockholder who requests a copy.
Executive Officers
Information regarding the executive officers of the Company is set forth in Part III, Item 10 of this report and is incorporated herein by reference.
Item 1A. Risk Factors
The following are some of the risks and uncertainties that could negatively affect the Company’s consolidated financial condition, results of operations, business and prospects. These risk factors are grouped into three categories: risks relating to the Company’s business and operations; risks relating to the Company’s capital structure and financings; and risks arising from the Company’s status as a REIT and the regulatory environment in which it operates.

These risks, as well as the risks described in Item 1 under the headings “Competition,” “Government Regulation,” “Legislative Developments,” and “Environmental Matters,” and in Item 7 under the heading “Disclosure Regarding Forward-Looking Statements” should be carefully considered before making an investment decision regarding the Company. The risks and uncertainties described below are not the only ones facing the Company, and there may be additional risks that the Company does not presently know of or that the Company currently considers not likely to have a significant impact. If any of the events underlying the following risks actually occurred, the Company’s business, consolidated financial condition, operating results and cash flows, including distributions to the Company's stockholders, could suffer, and the trading price of its common stock could decline.
Risk relating to our business and operations
The Company's expected results may not be achieved.
The Company's expected results may not be achieved, and actual results may differ materially from expectations. This may be the result of various factors, including, but not limited to: changes in the economy; the availability and cost of capital at favorable rates; increases in property taxes, changes to facility-related healthcare regulations; changes in interest rates; competition for quality assets; negative developments in the operating results or financial condition of the Company's tenants, including, but not limited to, their ability to pay rent and repay loans; the Company's ability to reposition or sell facilities with profitable results; the Company's ability to re-lease space at similar rates as vacancies occur; the Company's ability to timely reinvest proceeds from the sale of assets at similar yields; government regulations affecting tenants' Medicare and Medicaid reimbursement rates and operational requirements; unanticipated difficulties and/or expenditures relating to future acquisitions and developments; changes in rules or practices governing the Company's financial reporting; and other legal and operational matters.
The Company’s revenues depend on the ability of its tenants under its leases to generate sufficient income from their operations to make rental payments to the Company.
The Company’s revenues are subject to the financial strength of its tenants and associated health systems. The Company has no operational control over the business of these tenants and associated health systems who face a wide range of economic, competitive, government reimbursement and regulatory pressures and constraints. Any slowdown in the economy, decline in the availability of financing from the capital markets, and changes in healthcare regulations may adversely affect the businesses of the Company’s tenants to varying degrees. Such conditions may further impact such tenants’ abilities to meet their obligations to the Company and, in certain cases, could lead to restructurings, disruptions, or bankruptcies of such tenants. In turn, these conditions could adversely affect the Company’s revenues and could increase allowances for losses and result in impairment charges, which could decrease net income attributable to common stockholders and equity, and reduce cash flows from operations.

6



The Company may decide or may be required under purchase options to sell certain properties. The Company may not be able to reinvest the proceeds from sales at rates of return equal to the return received on the properties sold. Uncertain market conditions could result in the Company selling properties at unfavorable rates or at losses in the future.
The Company had approximately $95.2 million, or 2.5% of the Company’s real estate property investments, that were subject to purchase options held by lessees that were exercisable as of December 31, 2017. Other properties have purchase options that will become exercisable in future periods. Properties with options exercisable in 2018 produced aggregate net operating income of approximately $9.1 million in 2017. The exercise of these purchase options exposes the Company to reinvestment risk and a reduction in investment return. Certain properties subject to purchase options may be purchased at rates of return above the rates of return the Company expects to achieve with new investments. If the Company is unable to reinvest the sale proceeds at rates of return equal to the return received on the properties that are sold, it may experience a decline in lease revenues and profitability and a corresponding material adverse effect on the Company’s consolidated financial condition and results of operations.

In October 2017, the Company received notice that a tenant is exercising a purchase option on seven properties, comprised of five single-tenant net leased buildings and two multi-tenanted buildings, covered by one purchase option with a stated purchase price of approximately $45.5 million, subject to certain contractual adjustments. Closing of the sale is expected to occur in April 2018.

For more specific information concerning the Company’s purchase options, see “Purchase Options” in the “Trends and Matters Impacting Operating Results” as a part of Management's Discuss and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of this report.
Owning real estate and indirect interests in real estate is subject to inherent risks.
The Company’s operating performance and the value of its real estate assets are subject to the risk that if its properties do not generate revenues sufficient to meet its operating expenses, including debt service, the Company’s cash flow and ability to pay dividends to stockholders will be adversely affected.
The Company may incur impairment charges on its real estate properties or other assets.
The Company performs an impairment review on its real estate properties every year. In addition, the Company assesses the potential for impairment of identifiable intangible assets and long-lived assets, including real estate properties, whenever events occur or a change in circumstances indicates that the recorded value might not be fully recoverable. The decision to sell a property also requires the Company to assess the potential for impairment. At some future date, the Company may determine that an impairment has occurred in the value of one or more of its real estate properties or other assets. In such an event, the Company may be required to recognize an impairment which could have a material adverse effect on the Company’s consolidated financial condition and results of operations.
If the Company is unable to promptly re-let its properties, if the rates upon such re-letting are significantly lower than the previous rates or if the Company is required to undertake significant expenditures or make significant leasing concessions to attract new tenants, then the Company’s business, consolidated financial condition and results of operations would be adversely affected.
A portion of the Company’s leases will expire over the course of any year. For more specific information concerning the Company’s expiring leases, see "Multi-Tenant Leases" and "Single-Tenant Net Leases" in the "Trends and Matters Impacting Operating Results" as part of Management's Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of this report. The Company may not be able to re-let space on terms that are favorable to the Company or at all. Further, the Company may be required to make significant capital expenditures to renovate or reconfigure space or make significant leasing concessions to attract new tenants. If unable to promptly re-let its properties, if the rates upon such re-letting are significantly lower than the previous rates, or if the Company is required to undertake significant capital expenditures in connection with re-letting units, the Company’s business, consolidated financial condition and results of operations.
Certain of the Company’s properties are special purpose healthcare facilities and may not be easily adaptable to other uses.
Some of the Company’s properties are specialized medical facilities. If the Company or the Company’s tenants terminate the leases for these properties or the Company’s tenants lose their regulatory authority to operate such properties, the Company may not be able to locate suitable replacement tenants to lease the properties for their specialized uses. Alternatively, the Company may be required to spend substantial amounts to adapt the properties to other uses. Any loss of revenues and/or additional capital expenditures occurring as a result may have a material adverse effect on the Company’s consolidated financial condition and results of operations.
The Company has, and in the future may have more, exposure to fixed rent escalators, which could lag behind inflation and the growth in operating expenses such as real estate taxes, utilities, insurance, and maintenance expense.
The Company receives a significant portion of its revenues by leasing assets subject to fixed rent escalations. Eighty-seven percent of leases have increases that are based upon fixed percentages, eleven percent of leases have increases based on the

7



Consumer Price Index and two percent have no increase. If the fixed percentage increases begin to lag behind inflation and operating expense growth, the Company's performance, growth, and profitability would be negatively impacted.
The Company’s real estate investments are illiquid and the Company may not be able to sell properties strategically targeted for disposition.
Because real estate investments are relatively illiquid, the Company’s ability to adjust its portfolio promptly in response to economic or other conditions is limited. Certain significant expenditures generally do not change in response to economic or other conditions, including debt service (if any), real estate taxes, and operating and maintenance costs. This combination of variable revenue and relatively fixed expenditures may result in reduced earnings and could have an adverse effect on the Company’s financial condition. In addition, the Company may not be able to sell properties targeted for disposition, including properties held for sale, due to adverse market conditions. This may negatively affect, among other things, the Company’s ability to sell properties on favorable terms, execute its operating strategy, repay debt, pay dividends or maintain its REIT status.
The Company is subject to risks associated with the development and redevelopment of properties.
The Company expects development and redevelopment of properties will continue to be a key component of its growth plans. The Company is subject to certain risks associated with the development and redevelopment of properties including the following:
The construction of properties generally requires various government and other approvals that may not be received when expected, or at all, which could delay or preclude commencement of construction;

Opportunities that the Company pursued but later abandoned could result in the expensing of pursuit costs, which could impact the Company’s consolidated results of operations;

Construction costs could exceed original estimates, which could impact the building’s profitability to the Company;

Operating expenses could be higher than forecasted;

Time required to initiate and complete the construction of a property and to lease up a completed property may be greater than originally anticipated, thereby adversely affecting the Company’s cash flow and liquidity;

Occupancy rates and rents of a completed development property may not be sufficient to make the property profitable to the Company; and

Favorable capital sources to fund the Company’s development and redevelopment activities may not be available when needed.
The Company may make material acquisitions and undertake developments and redevelopments that may involve the expenditure of significant funds and may not perform in accordance with management’s expectations.
The Company regularly pursues potential transactions to acquire, develop or redevelop real estate assets. Future acquisitions could require the Company to issue equity securities, incur debt or other contingent liabilities or amortize expenses related to other intangible assets, any of which could adversely impact the Company’s consolidated financial condition or results of operations. In addition, equity or debt financing required for such acquisitions may not be available at favorable times or rates.
The Company’s acquired, developed, redeveloped and existing real estate properties may not perform in accordance with management’s expectations because of many factors including the following:
The Company’s purchase price for acquired facilities may be based upon a series of market or building-specific judgments which may be incorrect;

The costs of any maintenance or improvements for properties might exceed estimated costs;

The Company may incur unexpected costs in the acquisition, construction or maintenance of real estate assets that could impact its expected returns on such assets; and

Leasing may not occur at all, within expected time frames or at expected rental rates.
Further, the Company can give no assurance that acquisition, development and redevelopment opportunities that meet management’s investment criteria will be available when needed or anticipated.

8



The Company is exposed to risks associated with geographic concentration.
As of December 31, 2017, the Company had investment concentrations of greater than 5% of its total investments in the Dallas, Texas (12.4%) and Seattle, Washington (11.2%) markets. These concentrations increase the exposure to adverse conditions that might affect these markets, including natural disasters, local economic conditions, local real estate market conditions, increased competition, state and local regulation, including property taxes, and other localized events or conditions.
Many of the Company’s leases are dependent on the viability of associated health systems. Revenue concentrations relating to these leases expose the Company to risks related to the financial condition of the associated health systems.
The Company’s revenue concentrations with tenants are diversified, with the largest revenue concentration relating to Baylor Scott & White Health and its affiliates, which accounted for 9.7% of the Company's consolidated revenues.
Most of the Company’s properties on or adjacent to hospital campuses are largely dependent on the viability of the health system’s campus where they are located, whether or not the hospital or health system is a tenant in such properties. The viability of these health systems depends on factors such as the quality and mix of healthcare services provided, competition, demographic trends in the surrounding community, market position and growth potential. If one of these hospitals is unable to meet its financial obligations, is unable to compete successfully, or is forced to close or relocate, the Company’s properties on or near such hospital campus could be adversely impacted.
Many of the Company’s properties are held under ground leases. These ground leases contain provisions that may limit the Company’s ability to lease, sell, or finance these properties.
As of December 31, 2017, the Company had 109 properties that were held under ground leases, including one property with construction in progress, representing an aggregate gross investment of approximately $2.1 billion. The weighted average remaining term of the Company's ground leases is approximately 68.7 years, including renewal options. The Company’s ground lease agreements with hospitals and health systems typically contain restrictions that limit building occupancy to physicians on the medical staff of an affiliated hospital and prohibit tenants from providing services that compete with the services provided by the affiliated hospital. Ground leases may also contain consent requirements or other restrictions on sale or assignment of the Company’s leasehold interest, including rights of first offer and first refusal in favor of the lessor. These ground lease provisions may limit the Company’s ability to lease, sell, or obtain mortgage financing secured by such properties which, in turn, could adversely affect the income from operations or the proceeds received from a sale. As a ground lessee, the Company is also exposed to the risk of reversion of the property upon expiration of the ground lease term, or an earlier breach by the Company of the ground lease, which may have a material adverse effect on the Company’s consolidated financial condition and results of operations.
The Company may experience uninsured or underinsured losses.
The Company carries comprehensive liability insurance and property insurance covering its owned and managed properties. In addition, tenants under single-tenant net leases are required to carry property insurance covering the Company’s interest in the buildings. Some types of losses may be uninsurable or too expensive to insure against. Insurance companies limit or exclude coverage against certain types of losses, such as losses due to named windstorms, terrorist acts, earthquakes, and toxic mold. Accordingly, the Company may not have sufficient insurance coverage against certain types of losses and may experience decreases in the insurance coverage available. Should an uninsured loss or a loss in excess of insured limits occur, the Company could lose all or a portion of the capital it has invested in a property, as well as the anticipated future revenue from the property. In such an event, the Company might remain obligated for any mortgage debt or other financial obligation related to the property. Further, if any of the Company's insurance carriers were to become insolvent, the Company would be forced to replace the existing coverage with another suitable carrier, and any outstanding claims would be at risk for collection. In such an event, the Company cannot be certain that the Company would be able to replace the coverage at similar or otherwise favorable terms.
The Company has obtained title insurance policies for each of its properties, typically in an amount equal to its original price. However, these policies may be for amounts less than the current or future values of our properties. In such an event, if there is a title defect relating to any of the Company's properties, it could lose some of the capital invested in and anticipated profits from such property. The Company cannot give assurance that material losses in excess of insurance proceeds will not occur in the future.

9



The Company faces risks associated with security breaches through cyber attacks, cyber intrusions, or otherwise, as well as other significant disruptions of its information technology networks and related systems.
The Company faces risks associated with security breaches, whether through cyber attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to emails, persons inside the Company, or persons with access to systems inside the Company, and other significant disruptions of the Company's information technology ("IT") networks and related systems. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity, and sophistication of attempted attacks and intrusions from around the world have increased. The Company's IT networks and related systems are essential to the operation of its business and its ability to perform day-to-day operations (including managing building systems) and, in some cases, may be critical to the operations of certain of our tenants. Although the Company makes efforts to maintain the security and integrity of these types of IT networks and related systems, and we have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that these security measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well protected information, networks, systems, and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target, and in some cases are designed not to be detected and may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and it is therefore impossible to entirely mitigate the risk.
A security breach or other significant disruption involving the Company's IT network and related systems could:
disrupt the proper functioning of the Company's networks and systems and therefore the Company's operations and/or those of certain tenants;
result in misstated financial reports, violations of loan covenants, missed reporting deadlines, and/or missed permitting deadlines;
result in the Company's inability to properly monitor its compliance with the rules and regulations regarding the Company's qualification as a REIT;
result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of proprietary, confidential, sensitive, or otherwise valuable information of the Company or others, which others could use to compete against the Company or which could expose it to damage claims by third-parties for disruption, destructive, or otherwise harmful purposes or outcomes;
result in the Company's inability to maintain the building systems relied upon by the its tenants for the efficient use of their leased space;
require significant management attention and resources to remedy any damages that result;
subject the Company to claims for breach of contract, damages, credits, penalties, or termination of leases or other agreements; or
damage the Company's reputation among its tenants and investors generally.

Any or all of the foregoing could have a material adverse effect on the Company's consolidated financial condition and results of operations.
Risks relating to our capital structure and financings
The Company has incurred significant debt obligations and may incur additional debt and increase leverage in the future.
As of December 31, 2017, the Company had approximately $1.3 billion of outstanding indebtedness and the Company’s leverage ratio [debt divided by (debt plus stockholders’ equity less intangible assets plus accumulated depreciation)] was 32.3%. Covenants under the Credit Agreement, dated as of October 14, 2011, among the Company and Wells Fargo Bank, National Association, as Administrative Agent, and the other lenders that are party thereto, as amended (“Unsecured Credit Facility”), the Term Loan Agreement, dated as of February 27, 2014, among the Company, Wells Fargo Bank, National Association, as Administrative Agent, and the other lenders that are party thereto, as amended (the “Unsecured Term Loan due 2022”) and the indentures governing the Company’s senior notes permit the Company to incur substantial, additional debt, and the Company may borrow additional funds, which may include secured borrowings. A high level of indebtedness would require the Company to dedicate a substantial portion of its cash flows from operations to service the debt, thereby reducing the funds available to implement the Company’s business strategy and to make distributions to stockholders. A high level of indebtedness could also:
limit the Company’s ability to adjust rapidly to changing market conditions in the event of a downturn in general economic conditions or in the real estate and/or healthcare industries;

10



impair the Company’s ability to obtain additional debt financing or require potentially dilutive equity to fund obligations and carry out its business strategy; and
result in a downgrade of the rating of the Company’s debt securities by one or more rating agencies, which would increase the costs of borrowing under the Unsecured Credit Facility and the cost of issuance of new debt securities, among other things.
In addition, from time to time, the Company secures or assumes mortgages to partially fund its investments. If the Company is unable to meet its mortgage payments, then the encumbered properties could be foreclosed upon or transferred to the mortgagee with a consequent loss of income and asset value. A foreclosure on one or more of the Company's properties could have a material adverse effect on the Company’s consolidated financial condition and results of operations.
The Company generally does not intend to reserve funds to retire existing debt upon maturity. The Company may not be able to repay, refinance, or extend any or all of our debt at maturity or upon any acceleration. If any refinancing is done at higher interest rates, the increased interest expense could adversely affect the Company's financial condition and results of operations. Any such refinancing could also impose tighter financial ratios and other covenants that restrict the Company's ability to take actions that could otherwise be in its best interest, such as funding new development activity, making opportunistic acquisitions, or paying dividends.
Covenants in the Company’s debt instruments limit its operational flexibility, and a breach of these covenants could materially affect the Company’s consolidated financial condition and results of operations.
The terms of the Unsecured Credit Facility, the Unsecured Term Loan due 2022, the indentures governing the Company’s outstanding senior notes and other debt instruments that the Company may enter into in the future are subject to customary financial and operational covenants. These provisions include, among other things: a limitation on the incurrence of additional indebtedness; limitations on mergers, investments, acquisitions, redemptions of capital stock, and transactions with affiliates; and maintenance of specified financial ratios. The Company’s continued ability to incur debt and operate its business is subject to compliance with these covenants, which limit operational flexibility. Breaches of these covenants could result in defaults under applicable debt instruments, even if payment obligations are satisfied. Financial and other covenants that limit the Company’s operational flexibility, as well as defaults resulting from a breach of any of these covenants in its debt instruments, could have a material adverse effect on the Company’s consolidated financial condition and results of operations.
A change to the Company’s current dividend payment may have an adverse effect on the market price of the Company’s common stock.
The ability of the Company to pay dividends is dependent upon its ability to maintain funds from operations and cash flow, to make accretive new investments and to access capital. There can be no assurance that the Company will continue to pay dividends at current amounts, or at all. A failure to maintain dividend payments at current levels could result in a reduction of the market price of the Company’s common stock.
If lenders under the Unsecured Credit Facility fail to meet their funding commitments, the Company’s operations and consolidated financial position would be negatively impacted.
Access to external capital on favorable terms is critical to the Company’s success in growing and maintaining its portfolio. If financial institutions within the Unsecured Credit Facility were unwilling or unable to meet their respective funding commitments to the Company, any such failure would have a negative impact on the Company’s operations, consolidated financial condition and ability to meet its obligations, including the payment of dividends to stockholders.
The unavailability of equity and debt capital, volatility in the credit markets, increases in interest rates, or changes in the Company’s debt ratings could have an adverse effect on the Company’s ability to meet its debt payments, make dividend payments to stockholders or engage in acquisition and development activity.
A REIT is required by the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), to make dividend distributions, thereby retaining less of its capital for growth. As a result, a REIT typically requires new capital to invest in real estate assets. However, there may be times when the Company will have limited access to capital from the equity and/or debt markets. Changes in the Company’s debt ratings could have a material adverse effect on its interest costs and financing sources. The Company’s debt rating can be materially influenced by a number of factors including, but not limited to, acquisitions, investment decisions, and capital management activities. In recent years, the capital and credit markets have experienced volatility and at times have limited the availability of funds. The Company’s ability to access the capital and credit markets may be limited by these or other factors, which could have an impact on its ability to refinance maturing debt, fund dividend payments and operations, acquire healthcare properties and complete development and redevelopment projects. If the Company is unable to refinance or extend principal payments due at maturity of its various debt instruments, its cash flow may not be sufficient to repay maturing debt and, consequently, make dividend payments to stockholders. If the Company defaults in paying any of its debts or satisfying its debt covenants, it could experience cross-defaults among debt instruments, the debts could be accelerated and the Company could be forced to liquidate assets for less than the values it would otherwise receive.

11



Further, the Company obtains credit ratings from various credit-rating agencies based on their evaluation of the Company's credit. These agencies' ratings are based on a number of factors, some of which are not within the Company's control. In addition to factors specific to the Company's financial strength and performance, the rating agencies also consider conditions affecting REITs generally. The Company cannot assure you that its credit ratings will not be downgraded. If the Company's credit ratings are downgraded or other negative action is taken, the Company could be required, among other things, to pay additional interest and fees on borrowings under the Unsecured Credit Facility and Unsecured Term Loan due 2022.
The Company is exposed to increases in interest rates, which could adversely impact its ability to refinance existing debt, sell assets or engage in acquisition and development activity.
The Company receives a significant portion of its revenues by leasing its assets under long-term leases in which the rental rate is generally fixed, subject to annual rent escalators. A significant portion of the Company’s debt may be subject to floating rates, based on LIBOR or other indices. The generally fixed nature of revenues and the variable rate of certain debt obligations create interest rate risk for the Company. Increases in interest rates could make the financing of any acquisition or investment activity more costly. Rising interest rates would increase the cost of borrowing under the Unsecured Credit Facility and the Unsecured Term Loan due 2022, could limit the Company’s ability to refinance existing debt when it matures or cause the Company to pay higher rates upon refinancing. An increase in interest rates also could have the effect of reducing the amounts that third parties might be willing to pay for real estate assets, which could limit the Company’s ability to sell assets at times when it might be advantageous to do so.
The Company's swap agreements may not effectively reduce its exposure to changes in interest rates. 
The Company enters into swap agreements from time to time to manage some of its exposure to interest rate volatility. These swap agreements involve risks, such as the risk that counterparties may fail to honor their obligations under these arrangements. In addition, these arrangements may not be effective in reducing the Company’s exposure to changes in interest rates. When the Company uses forward-starting interest rate swaps, there is a risk that it will not complete the long-term borrowing against which the swap is intended to hedge. If such events occur, the Company’s consolidated financial condition and results of operations may be adversely affected. See Note 10 to the Consolidated Financial Statements for additional information on the Company's interest rate swaps.
Risks relating to government regulations
If a healthcare tenant loses its licensure or certification, becomes unable to provide healthcare services, cannot meet its financial obligations to the Company or otherwise vacates a facility, the Company would have to obtain another tenant for the affected facility.
If the Company loses a tenant or sponsoring health system because such tenant loses its license or certification, becomes unable to provide healthcare services, cannot meet its financial obligations to the Company or otherwise vacates a facility, and the Company is unable to attract another healthcare provider on a timely basis and on acceptable terms, the Company’s cash flows and results of operations could suffer. Transfers of operations of healthcare facilities are often subject to regulatory approvals not required for transfers of other types of commercial operations and real estate.
Adverse trends in the healthcare service industry may negatively affect the Company’s lease revenues and the values of its investments.
The healthcare service industry may be affected by the following:

trends in the method of delivery of healthcare services;

competition among healthcare providers;

consolidation of large health insurers;

lower reimbursement rates from government and commercial payors, high uncompensated care expense, investment losses and limited admissions growth pressuring operating profit margins for healthcare providers;

availability of capital;

credit downgrades;

liability insurance expense;

regulatory and government reimbursement uncertainty resulting from the Affordable Care Act and other healthcare reform laws;

12




efforts to repeal, replace or modify the Affordable Care Act in whole or in part;

health reform initiatives to address healthcare costs through expanded value-based purchasing programs, bundled provider payments, health insurance exchanges, increased patient cost-sharing, geographic payment variations, comparative effectiveness research, lower payments for hospital readmissions, and shared risk-and-reward payment models such as accountable care organizations;

federal court decisions on cases challenging the legality of certain aspects of the Affordable Care Act;

federal and state government plans to reduce budget deficits and address debt ceiling limits by lowering healthcare provider Medicare and Medicaid payment rates;

equalizing Medicare payment rates across different settings;

heightened health information technology security standards and the meaningful use of electronic health records by healthcare providers; and

potential tax law changes affecting providers.

These changes, among others, can adversely affect the economic performance of some or all of the tenants and sponsoring health systems who provide financial support to the Company’s investments and, in turn, negatively affect the lease revenues and the value of the Company’s property investments.
The costs of complying with governmental laws and regulations may adversely affect the Company's results of operations.
All real property and the operations conducted on real property are subject to federal, state, and local laws and regulations relating to environmental protection and human health and safety. Some of these laws and regulations may impose joint and several liability on tenants, owners, or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may hinder the Company's ability to sell, rent, or pledge such property as collateral for future borrowings.

Compliance with new laws or regulations or stricter interpretation of existing laws may require the Company to incur significant expenditures. Future laws or regulations may impose significant environmental liability. Additionally, tenant or other operations in the vicinity of the Company's properties, such as the presence of underground storage tanks, or activities of unrelated third parties may affect the Company's properties. In addition, there are various local, state, and federal fire, health, life-safety, and similar regulations with which the Company may be required to comply and that may subject us to liability in the form of fines or damages for noncompliance. Any expenditures, fines, or damages that the Company must pay would adversely affect its results of operations. Proposed legislation to address climate change could increase utility and other costs of operating the Company's properties.

Discovery of previously undetected environmentally hazardous conditions may adversely affect the Company's financial condition and results of operations. Under various federal, state, and local environmental laws and regulations, a current or previous property owner or operator may be liable for the cost to remove or remediate hazardous or toxic substances on such property. These costs could be significant. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require significant expenditures or prevent the Company from entering into leases with prospective tenants that may be impacted by such laws. Environmental laws provide for sanctions for noncompliance and may be enforced by governmental agencies or private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos-containing materials. Third parties may seek recovery from real property owners or operators for personal injury or property damage associated with exposure to released hazardous substances. The cost of defending against claims of liability, of complying with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could adversely affect the Company's financial condition and results of operations.

13



If the Company fails to remain qualified as a REIT, the Company will be subject to significant adverse consequences, including adversely affecting the value of its common stock.
The Company intends to operate in a manner that will allow it to continue to qualify as a REIT for federal income tax purposes. Although the Company believes that it qualifies as a REIT, it cannot provide any assurance that it will continue to qualify as a REIT for federal income tax purposes. The Company’s continued qualification as a REIT will depend on the satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. The Company’s ability to satisfy the asset tests depends upon the characterization and fair market values of its assets. The Company’s compliance with the REIT income and quarterly asset requirements also depends upon the Company’s ability to successfully manage the composition of the Company’s income and assets on an ongoing basis. Accordingly, there can be no assurance that the Internal Revenue Service (“IRS”) will not contend that the Company has operated in a manner that violates any of the REIT requirements.

If the Company were to fail to qualify as a REIT in any taxable year, the Company would be subject to federal income tax, including any applicable alternative minimum tax, on its taxable income at regular corporate rates and possibly increased state and local taxes (and the Company might need to borrow money or sell assets in order to pay any such tax). Further, dividends paid to the Company’s stockholders would not be deductible by the Company in computing its taxable income. Any resulting corporate tax liability could be substantial and would reduce the amount of cash available for distribution to the Company’s stockholders, which in turn could have an adverse impact on the value of, and trading prices for, the Company’s common stock. In addition, in such event the Company would no longer be required to pay dividends to maintain REIT status, which could adversely affect the value of the Company’s common stock. Unless the Company were entitled to relief under certain provisions of the Internal Revenue Code, the Company also would continue to be disqualified from taxation as a REIT for the four taxable years following the year in which the Company failed to qualify as a REIT.

Even if the Company remains qualified for taxation as a REIT, the Company is subject to certain federal, state and local taxes on its income and assets, including taxes on any undistributed taxable income, and state or local income, franchise, property and transfer taxes. These tax liabilities would reduce the Company’s cash flow and could adversely affect the value of the Company’s common stock. For more specific information on state income taxes paid, see Note 16 to the Consolidated Financial Statements.
The Company’s Articles of Incorporation, as well as provisions of Maryland general corporation law, contain limits and restrictions on transferability of the Company’s common stock which may have adverse effects on the value of the Company’s common stock.
In order to qualify as a REIT, no more than 50% of the value of the Company’s outstanding shares may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) during the last half of a taxable year. To assist in complying with this REIT requirement, the Company’s Articles of Incorporation contain provisions restricting share transfers where the transferee would, after such transfer, own more than 9.9% either in number or value of the outstanding stock of the Company. If, despite this prohibition, stock is acquired increasing a transferee’s ownership to over 9.9% in value of the outstanding stock, the stock in excess of this 9.9% in value is deemed to be held in trust for transfer at a price that does not exceed what the purported transferee paid for the stock, and, while held in trust, the stock is not entitled to receive dividends or to vote. In addition, under these circumstances, the Company has the right to redeem such stock.
In addition, provisions of Maryland general corporation law may have anti-takeover effects that delay, defer or prevent a takeover attempt. These provisions include the following:
Preferred Stock. The Company's charter authorizes the board of directors to issue preferred stock in one or more classes and establish the preferences and rights of any class of preferred stock issued. These actions can be taken without stockholder approval. The issuance of preferred stock could have the effect of delaying or preventing someone from taking control of the Company.
Business combinations. Pursuant to the Maryland law, the Company cannot merge into or consolidate with another corporation or enter into a statutory share exchange transaction in which the Company is not the surviving entity or sell all or substantially all of its assets unless the board of directors adopts a resolution declaring the proposed transaction advisable and two-thirds of the stockholders voting together as a single class approve the transaction. Maryland law prohibits stockholders from taking action by written consent unless all stockholders consent in writing. The practical effect of this limitation is that any action required or permitted to be taken by the Company's stockholders may only be taken if it is properly brought before an annual or special meeting of stockholders. The Company's bylaws further provide that in order for a stockholder to properly bring any matter before a meeting, the stockholder must comply with requirements regarding advance notice. The foregoing provisions could have the effect of delaying until the next annual meeting stockholder actions that the holders of a majority of the Company's outstanding voting securities favor. These provisions may also discourage another person from making a tender offer

14



for the Company's common stock, because such person or entity, even if it acquired a majority of the Company's outstanding voting securities, would likely be able to take action as a stockholder, such as electing new directors or approving a merger, only at a duly called stockholders meeting. Maryland law also establishes special requirements with respect to business combinations between Maryland corporations and interested stockholders unless exemptions apply. Among other things, the law prohibits for five years a merger and other similar transactions between a corporation and an interested stockholder and requires a supermajority vote for such transactions after the end of the five-year period.
Control share acquisitions. Maryland general corporation law also provides that control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares owned by the acquirer or by officers or employee directors. The control share acquisition statute does not apply to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction, or to acquisitions approved or exempted by the corporation's charter or bylaws.
Maryland unsolicited takeover statute. Under Maryland law, the Company's board of directors could adopt various anti-takeover provisions without the consent of stockholders. The adoption of such measures could discourage offers for the Company or make an acquisition of the Company more difficult.

These restrictions on transfer of the Company’s shares could have adverse effects on the value of the Company’s common stock.
Complying with the REIT requirements may cause the Company to forego otherwise attractive opportunities.
To qualify as a REIT for federal income tax purposes, the Company must continually satisfy tests concerning, among other things, the sources of its income, the nature of its assets, the amounts it distributes to its stockholders and the ownership of its stock. The Company may be unable to pursue investments that would be otherwise advantageous to the Company in order to satisfy the source-of-income or distribution requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder the Company’s ability to make certain attractive investments.
The prohibited transactions tax may limit the Company's ability to sell properties.
A REIT's net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property held primarily for sale to customers in the ordinary course of business. The Company may be subject to the prohibited transaction tax equal to 100% of net gain upon a disposition of real property. Although a safe harbor to the characterization of the sale of real property by a REIT as a prohibited transaction is available, the Company cannot assure you that it can in all cases comply with the safe harbor or that it will avoid owning property that may be characterized as held primarily for sale to customers in the ordinary course of business. Consequently, the Company may choose not to engage in certain sales of its properties or may conduct such sales through a taxable REIT subsidiary, which would be subject to federal and state income taxation.
Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code.
Qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize the Company’s REIT qualification. The Company’s continued qualification as a REIT will depend on the Company’s satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. In addition, the Company’s ability to satisfy the requirements to qualify as a REIT depends in part on the actions of third parties over which the Company has no control or only limited influence, including in cases where the Company owns an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes.
New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more difficult or impossible for the Company to qualify as a REIT.
The present federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial or administrative action at any time, which could affect the federal income tax treatment of an investment in the Company. The federal income tax rules that affect REITs are constantly under review by persons involved in the legislative process, the IRS and the U.S. Treasury Department, which results in statutory changes as well as frequent revisions to regulations and interpretations. Revisions in federal tax laws and interpretations thereof could cause the Company to change its investments and commitments and affect the tax considerations of an investment in the Company. There can be no assurance that new legislation, regulations, administrative interpretations or court decisions will not change the tax laws significantly with respect to the Company’s qualification as a REIT or with respect to the federal income tax consequences of qualification.

15



Item 1B. Unresolved Staff Comments
None. 
Item 2. Properties
In addition to the properties described in Item 1. “Business,” in Note 2 to the Consolidated Financial Statements, and in Schedule III of Item 15 of this Annual Report on Form 10-K, the Company leases office space from unrelated third parties from time to time, including its headquarters, which are located at 3310 West End Avenue in Nashville, Tennessee. The Company’s corporate office lease currently covers approximately 36,653 square feet of rented space and expires on October 31, 2020. The Company’s base rent for 2017 was approximately $1.0 million for office space leases.
Item 3. Legal Proceedings
The Company is not aware of any pending or threatened litigation that, if resolved against the Company, would have a material adverse effect on the Company's consolidated financial position, results of operations, or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.

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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Shares of the Company’s common stock are traded on the New York Stock Exchange under the symbol “HR.” At December 31, 2017, there were 1,047 stockholders of record. The following table sets forth the high and low sales prices per share of common stock, and the dividends declared and paid per share of common stock related to the periods indicated.
 
 
High

 
Low

 
Dividends Declared
and Paid per Share

2017
 
 
 
 
 
First Quarter
$
32.50

 
$
29.80

 
$
0.30

Second Quarter
36.17

 
31.46

 
0.30

Third Quarter
34.65

 
31.78

 
0.30

Fourth Quarter (Dividend payable on March 6, 2018)
33.87

 
31.58

 
0.30

 
 
 
 
 
 
2016
 
 
 
 
 
First Quarter
$
31.09

 
$
27.50

 
$
0.30

Second Quarter
35.00

 
29.42

 
0.30

Third Quarter
36.60

 
32.80

 
0.30

Fourth Quarter
34.28

 
26.66

 
0.30

Future dividends will be declared and paid at the discretion of the Board of Directors. The Company’s ability to pay dividends is dependent upon its ability to generate funds from operations and cash flows, and to make accretive new investments.
Equity Compensation Plan Information
The following table provides information as of December 31, 2017 about the Company’s common stock that may be issued as restricted stock and upon the exercise of options, warrants and rights under all of the Company’s existing compensation plans, including the 2015 Stock Incentive Plan and the 2000 Employee Stock Purchase Plan.
 
Plan Category
 
Number of Securities to be
Issued upon Exercise of
Outstanding Options,
Warrants and Rights (1)

 
Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights (1)

 
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in the First
Column)

Equity compensation plans approved by security holders
 
318,100

 

 
2,087,307

Equity compensation plans not approved by security holders
 

 

 

Total
 
318,100

 

 
2,087,307

______
(1)
The outstanding options relate only to the 2000 Employee Stock Purchase Plan. The Company is unable to ascertain with specificity the number of securities to be issued upon exercise of outstanding rights under the 2000 Employee Stock Purchase Plan or the weighted average exercise price of outstanding rights under that plan. The 2000 Employee Stock Purchase Plan provides that shares of common stock may be purchased at a per share price equal to 85% of the fair market value of the common stock at the beginning of the offering period or a purchase date applicable to such offering period, whichever is lower.


17



Issuer Purchases of Equity Securities
During the year ended December 31, 2017, the Company withheld shares of Company common stock to satisfy employee tax withholding obligations payable upon the vesting of non-vested shares, as follows:
Period
Total Number of Shares Purchased

Average Price Paid per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs

January 1 - January 31
15,695

$
30.31



February 1 - February 28
886

30.35



March 1 - March 31




April 1 - April 30




May 1 - May 31




June 1 - June 30




July 1 - July 31




August 1 - August 31




September 1 - September 30




October 1 - October 31




November 1 - November 30




December 1 - December 31
77,822

32.31



Total
94,403

 
 
 


18



Item 6. Selected Financial Data
The following table sets forth financial information for the Company, which is derived from the Consolidated Financial Statements:
 
Year Ended December 31,
(Amounts in thousands except per share data)
2017

 
2016

 
2015

 
2014

 
2013 (1)

Statement of Income Data:
 
 
 
 
 
 
 
 
 
Total revenues
$
424,499

 
$
411,630

 
$
388,471

 
$
370,855

 
$
330,949

Total expenses
335,046

 
309,932

 
283,541

 
267,100

 
243,331

Other income (expense)
(66,357
)
 
(15,942
)
 
(46,094
)
 
(69,776
)
 
(100,710
)
Income (loss) from continuing operations
$
23,096

 
$
85,756

 
$
58,836

 
$
33,979

 
$
(13,092
)
Income (loss) from discontinued operations
(4
)
 
(185
)
 
10,600

 
(1,779
)
 
20,075

Net income attributable to common
 
 
 
 
 
 
 
 
 
       stockholders
$
23,092

 
$
85,571

 
$
69,436

 
$
31,887

 
$
6,946

 
 
 
 
 
 
 
 
 
 
Diluted earnings per common share:
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.18

 
$
0.78

 
$
0.59

 
$
0.35

 
$
(0.14
)
Income (loss) from discontinued operations
0.00

 
0.00

 
0.11

 
(0.02
)
 
0.22

Net income attributable to common
 
 
 
 
 
 
 
 
 
        stockholders
$
0.18

 
$
0.78

 
$
0.70

 
$
0.33

 
$
0.08

Weighted average common shares outstanding -
 
 
 
 
 
 
 
 
 
          Diluted
118,017

 
109,387

 
99,880

 
96,759

 
90,941

 
 
 
 
 
 
 
 
 
 
Balance Sheet Data (as of the end of the period):
 
 
 
 
 
 
 
 
 
Real estate properties, gross
$
3,838,638

 
$
3,628,221

 
$
3,380,908

 
$
3,258,279

 
$
3,067,187

Real estate properties, net
$
2,941,208

 
$
2,787,382

 
$
2,618,982

 
$
2,557,608

 
$
2,435,078

Mortgage notes receivable
$

 
$

 
$

 
$
1,900

 
$
125,547

Assets held for sale and discontinued
 
 
 
 
 
 
 
 
 
       operations, net
$
33,147

 
$
3,092

 
$
724

 
$
9,146

 
$
6,852

Total assets
$
3,193,585

 
$
3,040,647

 
$
2,810,224

 
$
2,757,510

 
$
2,729,662

Notes and bonds payable
$
1,283,880

 
$
1,264,370

 
$
1,424,992

 
$
1,403,692

 
$
1,348,459

Total stockholders' equity
$
1,789,883

 
$
1,653,414

 
$
1,242,747

 
$
1,221,054

 
$
1,245,286

 
 
 
 
 
 
 
 
 
 
Other Data:
 
 
 
 
 
 
 
 
 
Funds from operations (2)
$
134,274

 
$
174,420

 
$
124,571

 
$
146,493

 
$
92,166

Funds from operations per common share - Diluted (2)
$
1.13

 
$
1.59

 
$
1.25

 
$
1.51

 
$
1.00

Cash flows from operations
$
179,766

 
$
151,272

 
$
160,375

 
$
125,370

 
$
120,797

Dividends paid
$
142,327

 
$
131,759

 
$
120,266

 
$
116,371

 
$
111,571

Dividends declared and paid per common share
$
1.20

 
$
1.20

 
$
1.20

 
$
1.20

 
$
1.20

______
(1)
The Company did not have any dispositions that met the criteria for presentation as discontinued operations in 2015, 2016, or 2017. The year ended December 31, 2013 was restated to conform to the discontinued operations presentation for 2014. See Note 5 to the Consolidated Financial Statements for more information on the Company’s discontinued operations as of December 31, 2017.
(2)
The Company adopted ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs" and ASU No. 2015-15 "Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of -Credit Arrangements", as of January 1, 2016. Balance Sheet data for the years ending December 31, 2017, 2016 and 2015 shown above reflect this reclassification. Balance Sheet data for the years ending December 31, 2014 and 2013 have not been restated.
(3)
See "Management’s Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of funds from operations (“FFO”), including why the Company presents FFO and a reconciliation of net income attributable to common stockholders to FFO.

19



Item 7. Management's Discussions and Analysis of Financial Condition and Results of Operations
Disclosure Regarding Forward-Looking Statements
This report and other materials Healthcare Realty has filed or may file with the Securities and Exchange Commission (“SEC”), as well as information included in oral statements or other written statements made, or to be made, by senior management of the Company, contain, or will contain, disclosures that are “forward-looking statements.” Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “target,” “intend,” “plan,” “estimate,” “project,” “continue,” “should,” “could” and other comparable terms. These forward-looking statements are based on the current plans and expectations of management and are subject to a number of risks and uncertainties that could significantly affect the Company’s current plans and expectations and future financial condition and results.
Such risks and uncertainties as more fully discussed in Item 1A “Risk Factors” of this report and in other reports filed by the Company with the SEC from time to time include, among other things, the following:
The Company's expected results may not be achieved;
The Company’s revenues depend on the ability of its tenants under its leases to generate sufficient income from their operations to make rental payments to the Company;
The Company may decide or may be required under purchase options to sell certain properties. The Company may not be able to reinvest the proceeds from sale at rates of return equal to the return received on the properties sold. Uncertain market conditions could result in the Company selling properties at unfavorable rates or at losses in the future;
Owning real estate and indirect interests in real estate is subject to inherent risks;
The Company may incur impairment charges on its real estate properties or other assets;
If the Company is unable to promptly re-let its properties, if the rates upon such re-letting are significantly lower than the previous rates or if the Company is required to undertake significant expenditures to attract new tenants, then the Company’s business, consolidated financial condition and results of operations would be adversely affected;
Certain of the Company’s properties are special purpose healthcare facilities and may not be easily adaptable to other uses;
The Company has, and may have more in the future, exposure to fixed rent escalators, which could lag behind inflation and the growth in operating expenses such as real estate taxes, utilities, insurance, and maintenance expenses;
The Company’s real estate investments are illiquid and the Company may not be able to sell properties strategically targeted for disposition;
The Company is subject to risks associated with the development and redevelopment of properties;
The Company may make material acquisitions and undertake developments that may involve the expenditure of significant funds and may not perform in accordance with management’s expectations;
The Company is exposed to risks associated with geographic concentration;
Many of the Company’s leases are dependent on the viability of associated health systems. Revenue concentrations relating to these leases expose the Company to risks related to the financial condition of the associated health systems;
Many of the Company’s properties are held under ground leases. These ground leases contain provisions that may limit the Company’s ability to lease, sell, or finance these properties;
The Company may experience uninsured or underinsured losses;
The Company faces risks associated with security breaches through cyber attacks, cyber intrusions, or otherwise, as well as other significant disruptions of its information technology networks and related systems;
The Company has incurred significant debt obligations and may incur additional debt and increase leverage in the future;
Covenants in the Company’s debt instruments limit its operational flexibility, and a breach of these covenants could materially affect the Company’s consolidated financial condition and results of operations;

20



A change to the Company’s current dividend payment may have an adverse effect on the market price of the Company’s common stock;
If lenders under the Unsecured Credit Facility fail to meet their funding commitments, the Company’s operations and consolidated financial position would be negatively impacted;
The unavailability of equity and debt capital, volatility in the credit markets, increases in interest rates, or changes in the Company’s debt ratings could have an adverse effect on the Company’s ability to meet its debt payments, make dividend payments to stockholders or engage in acquisition and development activity;
The Company is exposed to increases in interest rates, which could adversely impact its ability to refinance existing debt, sell assets or engage in acquisition and development activity;
The Company's swap agreements may not effectively reduce its exposure to changes in interest rates;
If a healthcare tenant loses its licensure or certification, becomes unable to provide healthcare services, cannot meet its financial obligations to the Company or otherwise vacates a facility, the Company would have to obtain another tenant for the affected facility;
Adverse trends in the healthcare service industry may negatively affect the Company’s lease revenues and the values of its investments;
The costs of complying with governmental laws and regulations may adversely affect the Company's results of operations;
If the Company fails to remain qualified as a REIT, the Company will be subject to significant adverse consequences, including adversely affecting the value of its common stock;
The Company's Articles of Incorporation, as well as provisions of Maryland general corporation law, contain limits and restrictions on transferability of the Company's common stock which may have adverse effects on the value of the Company's common stock;
Complying with the REIT requirements may cause the Company to forego otherwise attractive opportunities;
The prohibited transactions tax may limit the Company's ability to sell properties;
Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code; and
New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more difficult or impossible for the Company to qualify as a REIT.
The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in the Company’s filings and reports, including, without limitation, estimates and projections regarding the performance of development projects the Company is pursuing.
The purpose of this Management's Discussion and Analysis of Financial Condition and Results of Operations is to provide an understanding of the Company's consolidated financial condition, results of operations and cash flows by focusing on the changes in key measures from year to year. This section is provided as a supplement to, and should be read in conjunction with, the Company's Consolidated Financial Statements and accompanying notes. This section is organized in the following sections:
Overview
Liquidity and Capital Resources
Trends and Matters Impacting Operating Results
Results of Operations
Non-GAAP Financial Measures and Key Performance Indicators
Off-Balance Sheet Arrangements
Contractual Obligations
Application of Critical Accounting Policies to Accounting Estimates

21



Overview
The Company owns and operates properties that facilitate the delivery of healthcare in primarily outpatient settings. To execute its strategy, the Company engages in a broad spectrum of integrated services including leasing, management, acquisition, financing, development and redevelopment of such properties. The Company seeks to generate stable, growing income and lower the long-term risk profile of its portfolio of properties by focusing on facilities located on or near the campuses of acute care hospitals associated with leading health systems. The Company seeks to reduce financial and operational risk by owning properties in diverse geographic locations with a broad tenant mix that includes over 30 physician specialties, as well as surgery, imaging, cancer and diagnostic centers.
Liquidity and Capital Resources
The Company monitors its liquidity and capital resources and relies on several key indicators in its assessment of capital markets for financing acquisitions and other operating activities as needed, including the following:
Leverage ratios and lending covenants;
Dividend payout percentage; and
Interest rates, underlying treasury rates, debt market spreads and equity markets.
The Company uses these indicators and others to compare its operations to its peers and to help identify areas in which the Company may need to focus its attention.
Sources and Uses of Cash
The Company's revenues are derived from its real estate property portfolio based on contractual arrangements with its tenants and sponsoring health systems. These sources of revenue represent the Company's primary source of liquidity to fund its dividends and its operating expenses, including interest incurred on debt, general and administrative costs, capital expenditures and other expenses incurred in connection with managing its existing portfolio and investing in additional properties. To the extent additional investments are not funded by these sources, the Company will fund its investment activity generally through equity or debt issuances either in the public or private markets, property dispositions or through proceeds from the Unsecured Credit Facility.
The Company expects to continue to meet its liquidity needs, including capital for additional investments, dividend payments and debt service funds through cash flows from operations and the cash flow sources addressed above. The Company also had unencumbered real estate assets, excluding assets held for sale, with a gross book value of approximately $3.4 billion at December 31, 2017, of which a portion could serve as collateral for secured mortgage financing. The Company believes that its liquidity and sources of capital are adequate to satisfy its cash requirements. The Company cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to the Company in sufficient amounts to meet its liquidity needs.
The Company has exposure to variable interest rates and its common stock price is impacted by the volatility in the stock markets. However, the Company’s leases, which provide its main source of income and cash flow, have terms of approximately one to 20 years and have lease rates that generally increase on an annual basis at fixed rates or based on consumer price indices.
Operating Activities
Cash flows provided by operating activities for the three years ended December 31, 2017, 2016 and 2015 were $179.8 million, $151.3 million and $154.0 million, respectively. Several items impact cash flows from operating activities including, but not limited to, cash generated from property operations, interest payments and the timing related to the payment of invoices and other expenses and receipt of tenant rent.
The Company may sell additional properties and redeploy cash from property sales into new investments. To the extent revenues related to the properties being sold exceed income from these new investments, the Company's consolidated results of operations and cash flows could be adversely affected.
See "Trends and Matters Impacting Operating Results" for additional information regarding the Company's operating activities.

22



Investing Activities
A summary of the significant transactions impacting investing activities for the year ended December 31, 2017 is listed below. See Note 4 to the Consolidated Financial Statements for more detail on these activities.

Outflows
The Company acquired 15 medical office buildings and increased its ownership interest in an existing medical office building during 2017 for a total purchase price of $327.2 million, including cash consideration of $283.1 million. This includes the assumption of mortgage notes payable of $45.8 million (excluding fair value adjustments totaling $0.6 million recorded at closing) and the acquisition of equity interests in limited liability companies that own two parking garages in Atlanta, Georgia. The following table details the acquisitions for the year ended December 31, 2017:
(Dollars in millions)
 
Health System Affiliation
 
Date
Acquired
 
Purchase Price

 
Mortgage
Notes Payable Assumed

 
Square
Footage

 
Hospital Campus Location (1)
St. Paul, Minnesota
 
Fairview Health
 
3/6/17
 
$
13.5

 
$

 
34,608

 
On
San Francisco, California
 
Sutter Health
 
6/12/17
 
26.8

 

 
75,649

 
On
Washington, D.C.
 
Trinity Health
 
6/13/17
 
24.0

 
(12.1
)
 
62,379

 
On
Los Angeles, California
 
HCA
 
7/31/17
 
16.3

 

 
42,780

 
On
Atlanta, Georgia
 
WellStar Health
 
11/1/17
 
25.5

 

 
76,944

 
On
Atlanta, Georgia
 
WellStar Health
 
11/1/17
 
30.3

 

 
74,024

 
On
Atlanta, Georgia
 
WellStar Health
 
11/1/17
 
49.7

 

 
118,180

 
On
Atlanta, Georgia (2)
 
Piedmont
 
11/1/17
 
6.7

 

 
19,732

 
ANC
Seattle, Washington
 
Overlake Health
 
11/1/17
 
12.7

 

 
26,345

 
ADJ
Atlanta, Georgia
 
WellStar Health
 
12/13/17
 
25.8

 
(10.5
)
 
59,427

 
On
Atlanta, Georgia
 
WellStar Health
 
12/13/17
 
15.4

 
(4.7
)
 
40,171

 
On
Atlanta, Georgia
 
WellStar Health
 
12/18/17
 
26.3

 
(11.8
)
 
66,984

 
On
Atlanta, Georgia
 
WellStar Health
 
12/18/17
 
14.2

 
(6.7
)
 
40,324

 
On
Chicago, Illinois
 
Ascension
 
12/18/17
 
28.7

 

 
99,526

 
On
Seattle, Washington
 
UW Medicine
 
12/18/17
 
8.8

 

 
32,828

 
ADJ
Austin, Texas (3)
 
Ascension
 
12/21/17
 
2.5

 

 
7,972

 
ADJ
 
 
 
 
 
 
$
327.2

 
$
(45.8
)
 
877,873

 
 
______
(1)
On = Located on a hospital campus; ADJ = Adjacent to hospital campus; ANC = Anchored
(2)
This building is not located on a hospital campus, but is 100% leased to a hospital system and is classified as anchored.
(3)
The Company acquired additional ownership interest in an existing building bringing the Company's ownership to 69.4%.

In 2017, the Company funded $32.3 million toward development and redevelopment of properties. In addition, the Company funded $44.6 million at its owned real estate properties, including first generation tenant improvement allowances and planned capital expenditures for acquisitions. The following table details these expenditures for the year ended December 31, 2017:
(Dollars in millions)
 
2017
1st generation tenant improvements & planned capital expenditures for acquisitions
 
$
5.4

2nd generation tenant improvements
 
20.4

Capital expenditures
 
18.8

Total capital funding
 
$
44.6





23



Inflows
The Company disposed of 10 properties in 2017 for a total sales price of $122.7 million, including cash proceeds of $119.4 million and $3.3 million of closing costs and related adjustments. The following table details these dispositions for the year ended December 31, 2017:
(Dollars in millions)
 
Date Disposed
 
Sales Price
 
Square Footage
 
Property Type (1)
Evansville, Indiana
 
3/6/17
 
$
6.4

 
29,500

 
OTH
Columbus, Georgia (2)
 
3/7/17
 
0.6

 
12,000

 
MOB
Las Vegas, Nevada (2)
 
3/30/17
 
5.5

 
18,147

 
MOB
Texas (3 properties)
 
3/31/17
 
69.5

 
169,722

 
IRF
Chicago, Illinois
 
6/16/17
 
0.5

 
5,100

 
MOB
San Antonio, Texas
 
6/29/17
 
14.5

 
39,786

 
IRF
Roseburg, Oregon
 
6/29/17
 
23.2

 
62,246

 
MOB
St. Louis, Missouri
 
9/7/17
 
2.5

 
79,980

 
MOB
Total dispositions
 
$
122.7

 
416,481

 
 
______
(1)
MOB = medical office building; IRF = inpatient rehabilitation facility; OTH = other
(2)
Previously classified as held for sale.

Financing Activities

Debt Activity
Below is a summary of the significant financing activity for the year ended December 31, 2017. See Notes 10 and 11 to the Consolidated Financial Statements for more information on the capital markets and financing activities:

The Company had the following changes in debt structure:
On December 11, 2017, the Company issued $300.0 million of unsecured senior notes due 2028 (the "Senior Notes due 2028") in a registered public offering. The Senior Notes due 2028 bear interest at 3.625%, payable semi-annually on January 15 and July 15, beginning July 15, 2018, and are due on January 15, 2028, unless redeemed earlier by the Company. The notes were issued at a discount of approximately $2.5 million, and the Company incurred approximately $2.7 million in debt issuance costs, resulting in an effective rate of 3.84%.

The Company redeemed the outstanding principal of $400.0 million on the unsecured senior notes due 2021 (the "Senior Notes due 2021") in two transactions. On November 1, 2017 and December 27, 2017, the Company redeemed $100.0 million and $300.0 million, respectively. The aggregate redemption price was $452.3 million, consisting of outstanding principal of $400.0 million, accrued interest of $9.5 million, and a "make-whole" amount of approximately $42.8 million for the early extinguishment of debt. The aggregate unaccreted discount and unamortized costs on these notes of $2.2 million was written off upon redemption. The Company recognized a loss on early extinguishment of debt of approximately $45.0 million in the fourth quarter of 2017 related to these redemptions.

On December 18, 2017, the Company entered into an amendment to its Unsecured Term Loan due 2022. The amendment to the Term Loan extends the maturity date from January 2019 to December 2022 and reduces the spread over LIBOR relating to the cost of borrowing by 10 basis points, based on the Company's unsecured debt ratings as of December 31, 2017.

On December 20, 2017, the Company entered into two interest rate swaps totaling $25.0 million to hedge the 1-month LIBOR portion of the cost of borrowing under the Unsecured Term Loan due 2022 to a fixed rate of interest of 2.18% (plus the applicable margin rate, currently 1.10%) through December 16, 2022.


24



The following table details the mortgage note payable activity for the year ended December 31, 2017:
(Dollars in millions)
 
Transaction Date
 
Borrowing (Repayment)
 
Encumbered Square Footage
 
Contractual Interest Rate
Debt assumptions:
 
 
 
 
 
 
 
 
Washington, D.C. (1)
 
06/13/17
 
$
12.1

 
62,379

 
4.7
%
Atlanta, Georgia (1)
 
12/13/17
 
10.5

 
59,427

 
3.5
%
Atlanta, Georgia (1)
 
12/13/17
 
4.7

 
40,171

 
5.5
%
Atlanta, Georgia (1)
 
12/18/17
 
11.8

 
66,984

 
3.3
%
Atlanta, Georgia (1)
 
12/18/17
 
6.7

 
40,324

 
4.1
%
Total borrowings
 
 
 
$
45.8

 
269,285

 
4.1
%
 
 
 
 
 
 
 
 
 
Repayments in full:
 
 
 
 
 
 
 
 
Minneapolis, Minnesota (2)
 
5/1/17
 
$
(0.2
)
 
60,476

 
6.5
%
Kingsport, Tennessee
 
9/28/17
 
(1.3
)
 
75,000

 
5.6
%
Columbus, Ohio
 
10/2/17
 
(0.2
)
 
73,331

 
5.5
%
Total repayments
 
$
(1.7
)
 
208,807

 
5.7
%
______
(1)
Assumed upon acquisition and excluding fair value adjustments totaling $0.6 million in aggregate recorded at closing.
(2)
This property has three remaining notes that are secured by the property with maturity dates ranging from 2022 to 2040, but is repayable, without penalty, in 2020.

Subsequent Activity
On January 30, 2018, the Company entered into two interest rate swaps totaling $50.0 million to hedge the 1-month LIBOR portion of the cost of borrowing under the Unsecured Term Loan due 2022 to a fixed rate of interest of 2.46% (plus the applicable margin rate, currently 1.10%) through December 16, 2022.
 
The following table details the Company's debt balances as of December 31, 2017:
 
 
                       Balance as of December 31, 2017(3)
 
Weighted Years to
Maturity

 
Effective
Interest Rate

Senior Notes due 2023
 
$247,703
 
5.3

 
3.95
%
Senior Notes due 2025
 
248,044
 
7.3

 
4.08
%
Senior Notes due 2028
 
294,757
 
10.0

 
3.84
%
Total Senior Notes Outstanding
 
$790,504
 
7.7

 
3.95
%
Unsecured credit facility due 2020 (1)
 
189,000
 
2.6

 
2.56
%
Unsecured term loan due 2022 (2)
 
148,994
 
5.0

 
2.77
%
Mortgage notes payable
 
155,382
 
5.6

 
4.82
%
Total Outstanding Notes and Bonds Payable
 
$1,283,880
 
6.4

 
3.71
%
______
(1)
As of December 31, 2017, the Company had $189.0 million outstanding under the Unsecured Credit Facility with a weighted average interest rate of approximately 2.56% and a remaining borrowing capacity of approximately $511.0 million.
(2)
The effective interest rate includes the impact of two interest rate swaps totaling $25.0 million to hedge the 1-month LIBOR portion of the cost of borrowing under the Term Loan to a fixed rate of interest of 2.18% (plus the applicable margin rate, currently 1.10%) through December 16, 2022.
(3)
Balances are reflected net of discounts and deferred financing costs and include premiums.

Debt Covenant Information
As of December 31, 2017, 99.2% of the Company’s debt balances were due after 2018. Also, as of December 31, 2017, the Company’s stockholders’ equity totaled approximately $1.8 billion and its leverage ratio [debt divided by (debt plus stockholders’ equity less intangible assets plus accumulated depreciation)] was approximately 32.3%. The Company’s fixed

25



charge ratio, calculated in accordance with Item 503 of Regulation S-K, includes only income from continuing operations which is reduced by depreciation and amortization and the operating results of properties currently classified as held for sale. In accordance with this definition, the Company’s earnings from continuing operations as of December 31, 2017 were sufficient to cover its fixed charges with a ratio of 1.4 to 1.0. Calculated in accordance with the fixed charge covenant ratio under its Unsecured Credit Facility, the Company’s earnings covered its fixed charges at a ratio of 3.8 to 1.0.

The Company’s various debt agreements contain certain representations, warranties, and financial and other covenants customary in such debt agreements. Among other things, these provisions require the Company to maintain certain financial ratios and impose certain limits on the Company’s ability to incur indebtedness and create liens or encumbrances. As of December 31, 2017, the Company was in compliance with the financial covenant provisions under all of its various debt instruments.
The Company plans to manage its capital structure to maintain compliance with its debt covenants consistent with its current profile. Downgrades in ratings by the rating agencies could have a material adverse impact on the Company’s cost and availability of capital, which could in turn have a material adverse impact on consolidated results of operations, liquidity and/or financial condition.

Common Stock Issuances
On February 19, 2016, the Company entered into sales agreements with five investment banks to allow sales under its at-the-market equity offering program of up to 10,000,000 shares of common stock. On May 5, 2017, the Company entered into a sales agreement with a sixth investment bank in connection with the same allotment of shares. No shares were issued under this program in 2017. The Company has 5,868,697 authorized shares remaining available to be sold under the current sales agreements as of February 14, 2018.

On August 14, 2017, the Company issued 8,337,500 shares of common stock, par value $0.01 per share, at $30.90 per share in an underwritten public offering pursuant to the Company's existing effective registration statement. The net proceeds of the offering, after underwriting discount and offering expenses, were approximately $247.1 million. The proceeds were invested into acquisitions and the repayment of indebtedness.
    
Dividends Payable
The Company is required to pay dividends to its stockholders at least equal to 90% of its taxable income in order to maintain its qualification as a REIT. Common stock cash dividends paid during or related to 2017 are shown in the table below:
 
Quarter
 
Quarterly Dividend

 
Date of Declaration
 
Date of Record
 
Date Paid/*Payable
4th Quarter 2016
 
$
0.30

 
January 31, 2017
 
February 14, 2017
 
February 28, 2017
1st Quarter 2017
 
$
0.30

 
May 2, 2017
 
May 16, 2017
 
May 31, 2017
2nd Quarter 2017
 
$
0.30

 
August 1, 2017
 
August 11, 2017
 
August 31, 2017
3rd Quarter 2017
 
$
0.30

 
October 31, 2017
 
November 16, 2017
 
November 30, 2017
4th Quarter 2017
 
$
0.30

 
February 13, 2018
 
February 23, 2018
 
* March 6, 2018

The ability of the Company to pay dividends is dependent upon its ability to generate funds from operations and cash flows and to make accretive new investments.
Trends and Matters Impacting Operating Results
Management monitors factors and trends important to the Company and the REIT industry in order to gauge their potential impact on the operations of the Company. Discussed below are some of the factors and trends that management believes may impact future operations of the Company.
Acquisitions and Dispositions
The Company acquired 15 medical office buildings and increased its ownership interest in an existing medical office building
during 2017 for a total purchase price of $327.2 million, including cash consideration of $283.1 million. This includes the assumption of mortgage notes payable of $45.8 million (excluding fair value adjustments totaling $0.6 million recorded upon acquisition) and the acquisition of equity interests in limited liability companies that own two parking garages in Atlanta, Georgia. The weighted average capitalization rate for these investments was 5.4%.


26



The Company disposed of 10 properties during 2017 for a total sales price of $122.7 million, including cash proceeds of $119.4 million and $3.3 million of closing costs and adjustments. The weighted average capitalization rate of the 2017 dispositions was 7.0%.

A component of the Company's strategy is to continually monitor its portfolio for opportunities to improve the overall quality. Properties that are located off-campus, in smaller markets or not associated with the delivery of outpatient healthcare may be sold for higher capitalization rates than properties acquired to replace them. Properties that meet the Company's investment criteria sell for lower capitalization rates because of their lower-risk profile and higher internal growth potential.

See the Company's discussion regarding the 2017 acquisitions and dispositions activity in Note 4 to the Consolidated Financial Statements.
Development and Redevelopment Activity
In 2017, the Company funded $32.3 million toward development and redevelopment of properties, including the following:

The Company began a redevelopment project of a medical office building in Charlotte, North Carolina, which includes a 38,000 square foot expansion. The Company funded $3.3 million during the year ended December 31, 2017. The project is expected to be completed in the first quarter of 2019.

The Company began development of a 151,000 square foot medical office building in Seattle, Washington. The Company funded $1.8 million during the year ended December 31, 2017. The project is expected to be completed in the second quarter of 2019.

The Company received a certificate of occupancy for a 99,957 square foot medical office building in Denver, Colorado. The Company spent $14.6 million during the year ended December 31, 2017 including approximately $2.8 million related to overages on tenant improvement projects that have been or will be reimbursed by the tenant. The Company expects to continue to fund tenant improvements throughout 2018 and 2019.

The Company completed the redevelopment and expansion of one of its medical office buildings in Nashville, Tennessee. The Company spent approximately $12.6 million on the redevelopment of this property during the year ended December 31, 2017, including approximately $3.2 million related to overages on tenant improvement projects that have been or will be reimbursed by the tenant.

The Company is in the planning stages with several health systems and developers regarding new development and redevelopment opportunities and expects one or more to begin in 2018. Total costs to develop or redevelop a typical medical office building can vary depending on the scope of the project, market rental terms, parking configuration, building amenities, asset type and geographic location.

The Company’s disclosures regarding projections or estimates of completion dates and leasing may not reflect actual results. See Note 15 to the Consolidated Financial Statements for more information on the Company’s development and redevelopment activities.
Security Deposits and Letters of Credit
As of December 31, 2017, the Company held approximately $10.0 million in letters of credit and security deposits for the benefit of the Company in the event the obligated tenant fails to perform under the terms of its respective lease. Generally, the Company may, at its discretion and upon notification to the tenant, draw upon these instruments if there are any defaults under the leases.
Multi-Tenant Leases
The Company expects that approximately 15% to 20% of the leases in its multi-tenant portfolio will expire each year. In-place multi-tenant leases have a weighted average lease term of 7.9 years and a weighted average remaining lease term of 3.6 years. During 2017, 599 leases totaling 2.0 million square feet in its multi-tenant portfolio expired, of which 459 leases totaling 1.6 million square feet were renewed or the tenants continue to occupy the space. Demand for well-located real estate with complementary practice types and services remains consistent, and the Company's 2017 quarterly tenant retention statistics ranged from 76% to 90%. In 2018, the Company has 623 leases totaling 2.0 million square feet in its multi-tenant portfolio that are scheduled to expire.  Of those leases, 86% are in on-campus buildings, which tend to have a high tenant retention rate.


27



The Company continues to emphasize revenue growth for its in-place leases. In 2017, the Company experienced contractual rental rate growth which averaged 2.7% for in-place leases compared to 2.5% in 2016. In addition, the Company continued to see strong quarterly weighted average rental rate growth for renewing leases ("cash leasing spread") and expects the majority of its renewals to increase between 3.0% and 4.0%. In 2017, quarterly cash leasing spreads ranged from 3.5% to 9.0% compared to 3.3% to 6.6% in 2016 related to the Company's 201 properties. In the Company's same store portfolio, quarterly cash leasing spreads ranged from 3.7% to 9.5% in 2017 compared to 3.9% to 7.2% in 2016.

In a further effort to maximize revenue growth and reduce its exposure to uncontrollable expenses such as taxes and utilities, the Company carefully manages its balance of lease types. Gross leases, wherein the Company has full exposure to all operating expenses, comprise 13% of its lease portfolio. Modified gross or base year leases, in which the Company and tenant both pay a share of operating expenses, comprise 31% of the Company's leased portfolio. Net leases, in which tenants pay all allowable operating expenses, total 56% of the leased portfolio.
Capital Additions
As a part of the Company's leasing practice, the Company seeks to earn a return on capital additions when determining asking lease rates for each property by considering gross investment, inclusive of any actual or expected capital additions. The Company invested $18.8 million, or $1.28 per square foot, in capital additions in 2017, $17.1 million, or $1.17 per square foot, in capital additions in 2016 and $16.0 million, or $1.12 per square foot in 2015.

Capital additions are long-term investments made to maintain and improve the physical and aesthetic attributes of the Company's owned properties. Examples of such improvements include, but are not limited to, material changes to, or the full replacement of, major building systems (exterior facade, building structure, roofs, elevators, mechanical systems, electrical systems, energy management systems, upgrades to existing systems for improved efficiency) and common area improvements (furniture, signage and artwork, bathroom fixtures and finishes, exterior landscaping, parking lots or garages). These additions are capitalized into the gross investment of a property and then depreciated over their estimated useful lives, typically ranging from 7 to 20 years. Capital additions specifically do not include recurring maintenance expenses, whether direct or indirect, related to the upkeep and maintenance of major building systems or common area improvements.  Capital additions also do not include improvements related to a specific tenant suite, unless the improvement is part of a major building system or common area improvement.
Tenant Improvements
The Company may provide a tenant improvement allowance in new or renewal leases for the purpose of refurbishing or renovating tenant space. Shorter-term leases (one to two years) generally do not include a tenant improvement allowance.

Tenant improvements spending totaled approximately $25.8 million in 2017, of which $5.4 million pertained to first generation space. Tenant improvements spending in 2016 totaled $39.8 million, of which $16.1 million pertained to first generation space. If tenants spend more than the allowance, the Company generally offers the tenant the option to finance the overage over the lease term with interest or reimburse the overage to the Company in a lump sum. In either case, such overages are amortized by the Company as rental income over the term of the lease. Interest earned on tenant overages is included in other operating income in the Company's Consolidated Statements of Income and totaled approximately $0.4 million in 2017, $0.5 million in 2016, and $0.6 million in 2015. The tenant overage amount amortized to rent totaled approximately $4.6 million in 2017, $4.6 million in 2016, and $4.5 million in 2015.

Second generation, multi-tenant tenant improvement commitments in 2017 for renewals averaged $1.78 per square foot per lease year, ranging quarterly from $1.38 to $2.30. In 2016, these commitments averaged $1.55 per square foot per lease year, ranging quarterly from $1.04 to $1.84. In 2015, these commitments averaged $1.21 per square foot per lease year, ranging quarterly from $0.78 to $1.80.

Second generation, multi-tenant tenant improvement commitments in 2017 for new leases averaged $3.60 per square foot per lease year, ranging quarterly from $2.10 to $4.78. In 2016, these commitments averaged $4.74 per square foot per lease year, ranging quarterly from $3.79 to $5.55. In 2015, these commitments averaged $3.41 per square foot per lease year, ranging quarterly from $2.79 to $3.75.
Leasing Commissions
In certain markets, the Company may pay leasing commissions to real estate brokers who represent either the Company or prospective tenants, with commissions generally equating to 4% to 6% of the gross lease value for new leases and 2% to 4% of the gross lease value for renewal leases. In 2017, the Company paid leasing commissions of approximately $7.1 million, or $0.49 per square foot, of which $1.3 million pertained to the leases for first generation space. In 2016, the Company paid leasing commissions of approximately $5.2 million, or $0.36 per square foot, of which $0.6 million pertained to the leases for

28



first generation space. The amount of leasing commissions amortized over the term of the applicable leases and included in property operating expense in the Company's Consolidated Statements of Income totaled $4.5 million, $4.2 million and $3.4 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Rent Abatements
Rent abatements, which generally take the form of deferred rent, are sometimes used to help induce a potential tenant to lease space in the Company's properties. Such abatements, when made, are amortized by the Company on a straight-line basis against rental income over the lease term. Rent abatements for 2017 totaled approximately $3.0 million, or $0.20 per square foot, of which $1.1 million pertained to leases for first generation space. Rent abatements for 2016 totaled approximately $3.5 million, or $0.24 per square foot, of which $1.2 million pertained to leases for first generation space. Rent abatements for 2015 totaled approximately $2.8 million, or $0.20 per square foot, of which $1.1 million pertained to leases for first generation space.
Single-Tenant Net Leases
No single-tenant net leases are scheduled to expire during 2018. The Company expects to sell five single-tenant net leased properties in April 2018 pursuant to a purchase option. See "Purchase Options" below.

As of December 31, 2017, the Company has a total of 21 single-tenant net leases, excluding assets held for sale, with a weighted average lease term of 12.3 years and a weighted average remaining lease term of 8.0 years.
Property Operating Agreement Expirations
One of the Company’s 201 owned real estate properties as of December 31, 2017 was covered under a property operating agreement between the Company and a sponsoring health system. This agreement contractually obligates the sponsoring health system to provide to the Company a minimum return on the Company’s investment in the property in exchange for the right to be involved in the operating decisions of the property, including tenancy. If the minimum return is not achieved through normal operations of the property, the Company calculates and accrues to property lease guaranty revenue, each quarter, any shortfalls due from the sponsoring health systems under the terms of the property operating agreement. This agreement expires in February 2019. The Company recognized $0.7 million in property operating guaranty revenue during 2017 related to this agreement.

Operating Leases
At December 31, 2017, the Company had 109 properties totaling 8.9 million square feet that were held under ground leases with a remaining weighted average term of 68.7 years, including renewal options. These ground leases typically have initial terms of 50 to 75 years with one to two renewal options extending the terms to 75 to 100 years, with expiration dates through 2117. As of December 31, 2017, the Company was obligated to make rental payments under operating lease agreements consisting primarily of the Company’s corporate office lease and ground leases related to 61 real estate investments, excluding those ground leases the Company has prepaid. Rental expense relating to the operating leases for the years ended December 31, 2017, 2016 and 2015 was $6.3 million, $5.7 million and $5.1 million, respectively.

29



Purchase Options
The Company had approximately $95.2 million in real estate properties as of December 31, 2017 that were subject to exercisable purchase options. The Company has approximately $442.4 million in real estate properties that are subject to purchase options that will become exercisable after 2018. Additional information about the amount and basis for determination of the purchase price is detailed in the table below (dollars in thousands):
 
 
 
 
Gross Real Estate Investment as of December 31, 2017
Year Exercisable
 
Number of Properties

 
Fair Market Value Method (1)

 
Non Fair Market Value Method (2)

 
Total

Current
 
4

 
$
95,187

 
$

 
$
95,187

2018
 

 

 

 

2019
 
2

 
41,521

 

 
41,521

2020
 

 

 

 

2021
 
1

 

 
14,984

 
14,984

2022
 

 

 

 

2023
 

 

 

 

2024
 

 

 

 

2025
 
5

 
18,883

 
221,929

 
240,812

2026
 

 

 

 

2027
 

 

 

 

2028 and thereafter
 
5

 
145,102

 

 
145,102

Total
 
17

 
$
300,693

 
$
236,913

 
$
537,606

_____
(1)
The purchase option price includes a fair market value component that is determined by an appraisal process.
(2)
Includes properties with stated purchase prices or prices based on fixed capitalization rates. These properties have purchase prices that are on average 18% greater than the Company's current gross investment.

In October 2017, the Company received notice that a tenant is exercising a purchase option on seven properties, comprised of five single-tenant net leased buildings and two multi-tenanted buildings, covered by one purchase option with a stated purchase price of approximately $45.5 million, subject to certain contractual adjustments. The Company's aggregate net book value for these properties was $23.9 million at December 31, 2017. The Company recognized net operating income of approximately $6.1 million for the twelve months ended December 31, 2017 from these properties. Closing of the sale is expected to occur in April 2018.
Debt Management
The Company maintains a conservative and flexible capital structure that allows it to fund new investments and operate its existing portfolio. The Company has approximately $154.9 million of mortgage notes payable, most of which were assumed when the Company acquired properties. In 2018, approximately $5.9 million of these mortgage notes payable will mature. The Company intends to repay the mortgage notes upon maturity. During 2017, the Company redeemed its Senior Notes due 2021, issued its Senior Notes due 2028 and renewed its Term Loan due 2022. The result of this activity extended the Company's maturities and reduced the Company's cost of borrowing from 4.28% at December 31, 2016 to 3.71% at December 31, 2017.

30




Impact of Inflation
The Company is subject to the risk of inflation as most of its revenues are derived from long-term leases. Most of the Company's leases provide for fixed increases in base rents or increases based on the Consumer Price Index, and require the tenant to pay all or some portion of increases in operating expenses. The Company believes that these provisions mitigate the impact of inflation. However, there can be no assurance that the Company's ability to increase rents or recover operating expenses will always keep pace with inflation. The following table shows the percentage of the Company's leases that provide for fixed or CPI-based rent increases by type as of December 31, 2017:

 
% Increase

% of Base Rent

Annual increase
 
 
CPI
2.1
%
10.0
%
Fixed
2.9
%
81.1
%
Non-annual increase
 
 
CPI
0.9
%
1.5
%
Fixed
1.9
%
5.9
%
No increase
 
 
Term > 1 year
%
1.5
%


New Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements for information on new accounting standards including both standards that the Company adopted during the year and those that have not yet been adopted. The Company continues to evaluate the impact of the new standards that have not yet been adopted.

Other Items Impacting Operations
General and administrative expenses will fluctuate quarter-to-quarter. The Company expects general and administrative expenses to increase approximately $0.8 million in the first quarter of 2018 over the fourth quarter of 2017. The first quarter administrative costs include customary increases in payroll taxes, non-cash ESPP expense and healthcare savings account fundings. Approximately $0.6 million is not expected to recur in subsequent quarters in 2018.

31



Results of Operations
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
The Company’s consolidated results of operations for 2017 compared to 2016 were significantly impacted by acquisitions, dispositions, extinguishments of debt, gain on sales and impairment charges recorded on real estate properties.

Revenues
Rental income increased $15.4 million, or 3.8%, to approximately $422.9 million compared to $407.5 million in the prior year and is comprised of the following:
 
 
 
Change
(Dollars in thousands)
2017

 
2016

 
$

 
%

Property operating
$
363,907

 
$
336,409

 
$
27,498

 
8.2
 %
Single-tenant net lease
52,873

 
63,871

 
(10,998
)
 
(17.2
)%
Straight-line rent
6,072

 
7,201

 
(1,129
)
 
(15.7
)%
Total Rental income
$
422,852

 
$
407,481

 
$
15,371

 
3.8
 %

Property operating income increased $27.5 million, or 8.2%, from the prior year primarily as a result of the following activity:
Acquisitions and developments in 2016 and 2017 resulted in an increase of $18.2 million.
Net leasing activity including contractual rent increases and renewals contributed $13.7 million.
Dispositions in 2016 and 2017 resulted in a decrease of $4.4 million.

Single-tenant net lease income decreased $11.0 million, or 17.2%, from the prior year primarily as a result of the following activity:
Dispositions in 2016 and 2017 resulted in a decrease of $10.1 million.
Reduction in lease revenue of $2.1 million upon tenant vacate and reclassification to held for sale.
Acquisitions in 2016 and 2017 resulted in an increase of $0.7 million.
Contractual rent increases resulted in an increase of $0.5 million.

Straight-line rent income decreased $1.1 million, or 15.7%, from the prior year primarily as a result of the following activity:
Acquisitions in 2016 and 2017 resulted in an increase of $0.8 million.
Dispositions in 2016 and 2017 resulted in a decrease of $0.5 million.
The effect of prior year rent abatements that expired and net leasing activity resulted in a decrease of $1.4 million.

Expenses
Property operating expenses increased $10.8 million, or 7.4%, for the year ended December 31, 2017 compared to the prior year primarily as a result of the following activity:
Acquisitions and developments in 2016 and 2017 resulted in an increase of $7.7 million.
Increases in portfolio operating expenses as follows:
property tax expense of $2.0 million;
maintenance and repair expense of $0.4 million;
ground lease straight-line rent expense of $0.8 million;
janitorial expense of $0.7 million;
utilities expense of $0.3 million;
compensation-related expense of $0.4 million; and
security expense of $0.1 million.
Dispositions in 2016 and 2017 resulted in a decrease of $1.6 million.



32



General and administrative expenses increased approximately $1.7 million, or 5.4%, for the year ended December 31, 2017 compared to the prior year primarily as a result of the following activity:
Increase in non-cash performance-based compensation expense totaling $2.6 million.
Increase in payroll compensation of $0.4 million.
Decrease in cash performance-based compensation expense totaling $0.8 million.
Other net decreases, including professional fees and other administrative costs, of $0.5 million.

Depreciation expense increased $14.8 million, or 11.6%, for the year ended December 31, 2017 compared to the prior year primarily as a result of the following activity:
Acquisitions and developments in 2016 and 2017 resulted in increases of $11.1 million.
Various building and tenant improvement expenditures caused increases of $11.9 million.
Dispositions in 2016 and 2017 resulted in decreases of $5.2 million.
Assets that became fully depreciated resulted in decreases of $3.0 million.

Other Income (Expense)
Other income (expense), a net expense, increased $50.4 million, or 316.2%, for the year ended December 31, 2017 compared to the prior year mainly due to the following activity:

Gain on Sales of Real Estate Properties
Gain on sales of real estate properties, excluding those classified within discontinued operations, totaling approximately $39.5 million and $41.0 million are associated with the sales of eight and six real estate properties during 2017 and 2016, respectively.
Interest Expense
Interest expense decreased $0.9 million for the year ended December 31, 2017 compared to the prior year. The components of interest expense are as follows:
(Dollars in thousands)
2017

 
2016

 
Change

 
Percentage Change

Contractual interest
$
54,435

 
$
55,666

 
$
(1,231
)
 
(2.2
)%
Net discount/premium accretion
187

 
(45
)
 
232

 
(515.6
)%
Deferred financing costs amortization
2,476

 
2,820

 
(344
)
 
(12.2
)%
Amortization of interest rate swap settlement
175

 
168

 
7

 
4.2
%
Interest cost capitalization
(871
)
 
(1,258
)
 
387

 
(30.8
)%
Total interest expense
$
56,402

 
$
57,351

 
$
(949
)
 
(1.7
)%

Contractual interest decreased $1.2 million, or 2.2%, primarily as a result of the following activity:
The Senior Notes due 2028 in an aggregate amount of $300.0 million were issued in the fourth quarter of 2017 and accounted for an increase of $0.6 million.
The Senior Notes due 2021 were repaid in the fourth quarter of 2017 and accounted for a decrease of $1.1 million.
The Unsecured Credit Facility due 2020 and Unsecured Term Loan due 2022 accounted for a net decrease of $0.2 million.
Mortgage notes assumed upon acquisition of real properties accounted for an increase of $0.3 million, and mortgage notes repayments accounted for a decrease of $0.9 million.
Scheduled monthly interest payments related to the Company's mortgage notes payable increased $0.1 million.

Loss on Extinguishments of Debt
Loss on extinguishment of debt of approximately $45.0 million is associated with the 2017 redemption of the Senior Notes due 2021. See Note 9 to the Consolidated Financial Statements for more information.




33



Impairment of Real Estate Assets
Impairment of real estate assets, excluding those classified within discontinued operations, totaling approximately $5.4 million is associated with the sale of two real estate properties during 2017.
Discontinued Operations
Loss from discontinued operations totaled approximately $0.2 million for the year ended December 31, 2016 and includes the results of operations, impairments and gains on sale related to assets classified as held for sale as of December 31, 2014. None of the Company's 2016 or 2017 dispositions met the definition of a discontinued operation as amended in Accounting Standards Update No. 2014-08, which the Company adopted in 2015.

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
The Company’s consolidated results of operations for 2016 compared to 2015 were significantly impacted by acquisitions, dispositions, extinguishments of debt, gains on sale and impairment charges recorded on real estate properties.

Revenues
Rental income increased $24.1 million, or 6.3%, to approximately $407.5 million compared to $383.3 million in the prior year and is comprised of the following:
 
 
 
Change
(Dollars in thousands)
2016

 
2015

 
$

 
%

Property operating
$
336,409

 
$
306,550

 
$
29,859

 
9.7
 %
Single-tenant net lease
63,871

 
67,238

 
(3,367
)
 
(5.0
)%
Straight-line rent
7,201

 
9,545

 
(2,344
)
 
(24.6
)%
Total Rental income
$
407,481

 
$
383,333

 
$
24,148

 
6.3
 %

Property operating income increased $29.9 million, or 9.7%, from the prior year primarily as a result of the following activity:
Acquisitions in 2015 and 2016 accounted for an increase of $19.3 million.
Net leasing activity including contractual rent increases and renewals accounted for an increase of $13.4 million.
Dispositions in 2015 accounted for a decrease of $2.9 million.

Single-tenant net lease income decreased $3.4 million, or 5.0%, from the prior year primarily as a result of the following activity:
Contractual rent increases accounted for an increase of $0.6 million.
Reduction in lease revenue of $0.6 million upon expiration and execution of new leases and reserves (see Trends and Matters Impacting Operating Results for additional information).
Dispositions in 2015 and 2016 accounted for a decrease of $3.3 million.

Straight-line rent income decreased $2.3 million, or 24.6%, from the prior year primarily as a result of the following activity:
Acquisitions in 2015 and 2016 accounted for an increase of $1.1 million.
Dispositions in 2015 and 2016 accounted for a decrease of $0.4 million.
The effect of prior year rent abatements that expired and net leasing activity caused a decrease of $3.0 million.

Expenses
Property operating expenses increased $6.3 million, or 4.5%, for the year ended December 31, 2016 compared to the prior year primarily as a result of the following activity:
Acquisitions in 2015 and 2016 accounted for an increase of $7.5 million.
Dispositions in 2015 and 2016 accounted for a decrease of $2.3 million.
The Company experienced overall increases in the following:
maintenance and repair expense of $0.4 million;
portfolio property taxes of $0.4 million;

34



leasing commission and legal fee expense of $0.2 million;
compensation-related expense of $0.7 million; and
janitorial expense of $0.2 million.
The Company experienced an overall decrease in utility expense of $0.8 million.

General and administrative expenses increased approximately $6.6 million, or 26.7%, for the year ended December 31, 2016 compared to the prior year primarily as a result of the following activity:
Increase in performance-based compensation expense totaling $5.1 million, including $1.5 million of non-cash stock-based award amortization.
Other net increases, including telecommunication expense and compensation-related expense, of $1.5 million.

Depreciation and amortization expense increased $11.1 million, or 9.5%, for the year ended December 31, 2016 compared to the prior year primarily as a result of the following activity:
Properties acquired in 2015 and 2016 and developments completed and commencing operations contributed a combined increase of $8.4 million.
Various building and tenant improvement expenditures caused an increases of $7.3 million.
Dispositions in 2015 caused a decrease of $2.6 million.
Assets that became fully depreciated resulted in a decrease of $2.0 million.

Other Income (Expense)
Other income (expense), a net expense, decreased $30.2 million, or 65.4%, for the year ended December 31, 2016 compared to the prior year mainly due to the following activity:

Gain on Sales of Real Estate Properties
Gain on sales of real estate properties excluding those classified within discontinued operations, totaling approximately $41.0 million and $56.6 million are associated with the sales of six and seven real estate properties during 2016 and 2015, respectively.
Interest Expense
Interest expense decreased $8.2 million for the year ended December 31, 2016 compared to the prior year. The components of interest expense are as follows:
(Dollars in thousands)
2016

 
2015

 
Change

 
Percentage Change

Contractual interest
$
55,666

 
$
62,215

 
$
(6,549
)
 
(10.5
)%
Net discount/premium accretion
(45
)
 
376

 
(421
)
 
(112.0
)%
Deferred financing costs amortization
2,820

 
3,067

 
(247
)
 
(8.1
)%
Amortization of interest rate swap settlement
168

 
115

 
53

 
46.1
%
Interest cost capitalization
(1,258
)
 
(239
)
 
(1,019
)
 
426.4
 %
Total interest expense
$
57,351

 
$
65,534

 
$
(8,183
)
 
(12.5
)%

Contractual interest decreased $6.5 million, or 10.5%, primarily as a result of the following activity:
The Unsecured Credit Facility and Unsecured Term Loan due 2022 accounted for a net decrease of $1.0 million.
Unsecured senior notes due 2025 in an aggregate amount of $250.0 million (the "Senior Notes due 2025") were issued in the second quarter of 2015 and accounted for an increase of $3.0 million.
The unsecured senior notes due 2017 (the "Senior Notes due 2017") were repaid in the second quarter of 2015 and accounted for a decrease of $7.3 million.
Mortgage notes assumed upon acquisition of real properties and mortgage notes refinanced accounted for an increase of $1.7 million, and mortgage notes repayments accounted for a decrease of $3.1 million.
Scheduled monthly interest payments related to the Company's mortgage notes payable increased $0.2 million.

35




Loss on Extinguishments of Debt
Loss on extinguishment of debt of approximately $28.0 million is associated with the 2015 redemption of the Senior Notes due 2017. See Note 9 to the Consolidated Financial Statements for more information.

Pension Termination
Pension termination expense of approximately $5.3 million represents the effect of the Company's termination of the Executive Retirement Plan in 2015.

Impairment of Real Estate Assets
Impairment of real estate assets excluding those classified within discontinued operations, totaling approximately $3.6 million is associated with the sale of two real estate properties during 2015.
Impairment of Internally-Developed Software
The Company recognized an impairment of internally-developed software of approximately $0.7 million in 2015, which was abandoned for a third party program that was previously unavailable.

Discontinued Operations
Loss from discontinued operations totaled $0.2 million and income from discontinued operations totaled $10.6 million, respectively, for the years ended December 31, 2016 and 2015, which includes the results of operations, impairments and gains on sale related to assets classified as held for sale as of December 31, 2014. None of the Company's 2015 or 2016 dispositions met the definition of a discontinued operation as amended in Accounting Standards Update No. 2014-08, which the Company adopted in 2015. The Company disposed of one real estate property in 2015 that was classified as held for sale at December 31, 2014 and one property remained classified as held for sale as of December 31, 2016.

Non-GAAP Financial Measures and Key Performance Indicators
Management considers certain non-GAAP financial measures and key performance indicators to be useful supplemental measures of the Company's operating performance. A non-GAAP financial measure is generally defined as one that purports to measure financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable measure determined in accordance with generally accepted accounting principles ("GAAP"). Set forth below are descriptions of the non-GAAP financial measures management considers relevant to the Company's business and useful to investors, as well as reconciliations of these measures to the most directly comparable GAAP financial measures.
The non-GAAP financial measures and key performance indicators presented herein are not necessarily identical to those presented by other real estate companies due to the fact that not all real estate companies use the same definitions. These measures should not be considered as alternatives to net income, as indicators of the Company's financial performance, or as alternatives to cash flow from operating activities as measures of the Company's liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of the Company's needs. Management believes that in order to facilitate a clear understanding of the Company's historical consolidated operating results, these measures should be examined in conjunction with net income and cash flows from operations as presented in the Consolidated Financial Statements and other financial data included elsewhere in this Annual Report on Form 10-K.
Funds from Operations ("FFO"), Normalized FFO and Funds Available for Distribution ("FAD")
FFO and FFO per share are operating performance measures adopted by the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as the most commonly accepted and reported measure of a REIT’s operating performance equal to “net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.”
In addition to FFO, the Company presents Normalized FFO and FAD. Normalized FFO is presented by adding to FFO acquisition-related costs, acceleration of deferred financing costs, debt extinguishment costs and other Company-defined normalizing items to evaluate operating performance. FAD is presented by adding to Normalized FFO non-real estate depreciation and amortization, deferred financing fees amortization, share-based compensation expense and provision for bad debts, net; and subtracting maintenance capital expenditures, including second generation tenant improvements and leasing commissions paid and straight-line rent income, net of expense. The Company's definition of these terms may not be comparable to that of other real estate companies as they may have different methodologies for computing these amounts. Normalized FFO and FAD should not be considered as an alternative to net income as an indicator of the Company's financial performance or to cash flow from operating activities as an indicator of the Company's liquidity. Normalized FFO and FAD should be reviewed in connection with GAAP financial measures.

36



Management believes FFO, Normalized FFO, FFO per share, Normalized FFO per share and FAD ("Non-GAAP Measures") provide an understanding of the operating performance of the Company’s properties without giving effect to certain significant non-cash items, primarily depreciation and amortization expense. Historical cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time. However, real estate values instead have historically risen or fallen with market conditions. The Company believes that by excluding the effect of depreciation, amortization, impairments and gains or losses from sales of real estate, all of which are based on historical costs and which may be of limited relevance in evaluating current performance, Non-GAAP Measures can facilitate comparisons of operating performance between periods. The Company reports Non-GAAP Measures because these measures are observed by management to also be the predominant measures used by the REIT industry and by industry analysts to evaluate REITs. For these reasons, management deems it appropriate to disclose and discuss these Non-GAAP Measures. However, none of these measures represent cash generated from operating activities determined in accordance with GAAP and are not necessarily indicative of cash available to fund cash needs. Further, these measures should not be considered as an alternative to net income as an indicator of the Company’s operating performance or as an alternative to cash flow from operating activities as a measure of liquidity.



37



The table below reconciles net income attributable to common stockholders to FFO, Normalized FFO and FAD for the years ended December 31, 2017, 2016, and 2015.
 
Year Ended December 31,
(Amounts in thousands, except per share data)
2017

 
2016

 
2015

Net income
$
23,092

 
$
85,571

 
$
69,436

Gain on sales of real estate properties
(39,524
)
 
(41,044
)
 
(67,172
)
Impairments
5,385

 
121

 
4,325

Real estate depreciation and amortization
145,321

 
129,772

 
117,982

Total adjustments
111,182

 
88,849

 
55,135

Funds from Operations
$
134,274

 
$
174,420

 
$
124,571

Acquisition and pursuit costs
2,180

 
3,414

 
1,394

Write-off of deferred financing costs upon amendment of credit facilities
21

 
81

 

Pension termination

 
4

 
5,260

Loss on extinguishment of debt
44,985

 

 
27,998

Impairment of internally-developed software

 

 
654

Interest incurred on the timing of issuance/redemption of senior notes
767

 

 

Security deposit recognized upon sale

 

 
141

Reversal of restricted stock amortization upon director / officer resignation

 

 
(40
)
Revaluation of awards upon retirement

 
89

 

Normalized Funds from Operations
$
182,227

 
$
178,008

 
$
159,978

Non-real estate depreciation and amortization
5,551

 
5,475

 
5,830

Provision for bad debt, net
159

 
(21
)
 
(194
)
Straight-line rent receivable, net
(4,575
)
 
(7,134
)
 
(8,829
)
Stock-based compensation
10,027

 
7,509

 
6,069

Provision for deferred post-retirement benefits

 

 
385

Non-cash items included in cash flows from operating activities
11,162

 
5,829

 
3,261

2nd Generation TI
(20,367
)
 
(23,692
)
 
(12,068
)
Leasing commissions paid
(7,099
)
 
(5,210
)
 
(7,504
)
Capital additions
(18,790
)
 
(17,122
)
 
(16,242
)
Funds Available for Distribution
$
147,133

 
$
137,813

 
$
127,425

Funds from Operations per Common Share - Diluted
$
1.13

 
$
1.59

 
$
1.25

Normalized Funds from Operations per Common Share - Diluted
$
1.53

 
$
1.63

 
$
1.60

Weighted average common shares outstanding - Diluted
118,877

 
109,387

 
99,880



38



Same Store NOI
Net operating income ("NOI") and same store NOI are key performance indicators. Management considers same store NOI a supplemental measure because it allows investors, analysts and Company management to measure unlevered property-level operating results. The Company defines NOI as operating revenues (property operating revenue, single-tenant net lease revenue, and property lease guaranty revenue) less property operating expenses related specifically to the property portfolio. NOI excludes general and administrative expenses, interest expense, depreciation and amortization, gains and losses from property sales, property management fees and other revenues and expenses not specifically related to the property portfolio. NOI also excludes non-cash items such as straight-line rent, above and below market lease intangibles, leasing commission amortization, lease inducements, lease terminations and tenant improvement amortization. Same store NOI is historical and not necessarily indicative of future results.
The following table reflects the Company's same store NOI for the years ended December 31, 2017 and 2016.
 
 
 
 
 
Same Store NOI for the
 
 
 
 
 
Year Ended December 31,
(Dollars in thousands)
Number of Properties (1)

 
Gross Investment at December 31, 2017

 
2017

 
2016

Multi-tenant Properties
142

 
$
2,665,547

 
$
191,663

 
$
182,777

Single-tenant Net Lease Properties
19

 
486,602

 
44,090

 
43,770

   Total
161

 
$
3,152,149

 
$
235,753

 
$
226,547

______
(1)
Properties are based on the same store definition included below and exclude assets classified as held for sale.

Properties included in the same store analysis are stabilized properties. Stabilized properties are properties that have been included in operations for the duration of the year-over-year comparison period presented and include redevelopment projects. Accordingly, stabilized properties exclude properties that were recently acquired or disposed of, properties classified as held for sale, and development conversions. In addition, the Company excludes properties that meet any of the following Company-defined criteria to be included in the reposition property group:

Properties having less than 60% occupancy that is expected to last at least two quarters;
Properties that experience a loss of occupancy over 30% in a single quarter; or
Properties with negative net operating income that is expected to last at least two quarters.

Any recently acquired property will be included in the same store pool once the Company has owned the property for eight full quarters. Development properties will be included in the same store pool eight full quarters after substantial completion. Any additional square footage created by redevelopment projects at a same store property is included in the same store pool immediately upon completion. Any property included in the reposition property group will be included in the same store analysis once occupancy has increased to 60% or greater with positive net operating income and has remained at that level for eight full quarters.



39



The following tables reconcile same store NOI to the respective line items in the Consolidated Statements of Income and the same store property count to the total owned real estate portfolio:    
Reconciliation of Same Store NOI:
 
Year Ended December 31,
(Dollars in thousands)
2017
 
2016
Net income
$
23,092

 
$
85,571

Loss from discontinued operations
4

 
185

Income from continuing operations
23,096

 
85,756

Other income (expense)
66,357

 
15,942

General and administrative expense
32,992

 
31,309

Depreciation and amortization expense
142,472

 
127,690

Other expenses (1)
8,636

 
8,967

Straight-line rent revenue
(6,072
)
 
(7,201
)
Other revenue (2)
(4,690
)
 
(5,531
)
NOI
262,791

 
256,932

NOI not included in same store
(27,038
)
 
(30,385
)
Same store NOI
$
235,753

 
$
226,547

 
 
 
 
______
(1)
Includes acquisition and pursuit costs, bad debt, above and below market ground lease intangible amortization, leasing commission amortization and ground lease straight-line rent.
(2)
Includes management fee income, storage income, interest, mortgage interest income, above and below market lease intangible amortization, lease inducement amortization, lease terminations and tenant improvement overage amortization.

Reconciliation of Same Store Property Count:
 
Property Count as of December 31, 2017

Same store properties
161

Acquisitions
25

Development Completions
2

Reposition
13

Total owned real estate properties
201


Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on its consolidated financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

40



Contractual Obligations
The Company monitors its contractual obligations to manage the availability of funds necessary to meet obligations when due. The following table represents the Company’s long-term contractual obligations for which the Company was making payments as of December 31, 2017, including interest payments due where applicable. The Company is also required to pay dividends to its stockholders at least equal to 90% of its taxable income in order to maintain its qualification as a REIT under the Internal Revenue Code. The Company's material contractual obligations are included in the table below. As of December 31, 2017, the Company had no long-term capital lease obligations.
 
Payments Due by Period
(Dollars in thousands)
Total

 
Less than
1 Year

 
1 -3
Years

 
3 - 5
Years

 
More than 5
Years

Long-term debt obligations, including interest (1)
$
1,559,843

 
$
48,326