HR 10-Q Quarterly Report March 31, 2015 | Alphaminr
HEALTHCARE REALTY TRUST INC
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HR 10-Q Quarter ended March 31, 2015

Balance Sheet
Cash Flow
Income Statement
HEALTHCARE REALTY TRUST INC
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10-Q 1 hr-2015331xsinglesource10q.htm 10-Q HR-2015.3.31- Single Source 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________
FORM 10-Q
____________________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to
Commission File Number: 001-11852
____________________________________________________________
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)

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 Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x 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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company 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 x
As of May 1, 2015 , the Registrant had 100,391,509 shares of Common Stock outstanding.


HEALTHCARE REALTY TRUST INCORPORATED
FORM 10-Q
March 31, 2015

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
Healthcare Realty Trust Incorporated
Condensed Consolidated Balance Sheets
(Amounts in thousands, except per share data)
(Unaudited)
March 31,
2015
December 31,
2014
ASSETS
Real estate properties:
Land
$
187,951

$
183,060

Buildings, improvements and lease intangibles
3,077,828

3,048,251

Personal property
10,014

9,914

Land held for development
21,376

17,054

3,297,169

3,258,279

Less accumulated depreciation
(723,393
)
(700,671
)
Total real estate properties, net
2,573,776

2,557,608

Cash and cash equivalents
10,417

3,519

Mortgage notes receivable
1,900

1,900

Assets held for sale and discontinued operations, net
14,164

9,146

Other assets, net
188,198

185,337

Total assets
$
2,788,455

$
2,757,510

LIABILITIES AND EQUITY
Liabilities:
Notes and bonds payable
$
1,444,555

$
1,403,692

Accounts payable and accrued liabilities
50,144

70,240

Liabilities of discontinued operations
102

372

Other liabilities
64,469

62,152

Total liabilities
1,559,270

1,536,456

Commitments and contingencies




Stockholders' Equity:
Preferred stock, $.01 par value; 50,000 shares authorized; none issued and outstanding
—

—

Common stock, $.01 par value; 150,000 shares authorized; 100,087 and 98,828 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively
1,001

988

Additional paid-in capital
2,423,121

2,389,830

Accumulated other comprehensive loss
(3,242
)
(2,519
)
Cumulative net income attributable to common stockholders
845,631

840,249

Cumulative dividends
(2,037,326
)
(2,007,494
)
Total stockholders’ equity
1,229,185

1,221,054

Total liabilities and equity
$
2,788,455

$
2,757,510


The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 , are an integral part of these financial statements.

1


Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 2015 and 2014
(Amounts in thousands, except per share data)
(Unaudited)
Three Months Ended March 31,
2015
2014
REVENUES
Rental income
$
95,034

$
86,502

Mortgage interest
31

2,621

Other operating
1,391

1,448

96,456

90,571

EXPENSES
Property operating
34,263

32,831

General and administrative
6,738

5,972

Depreciation
26,387

23,667

Amortization
2,667

2,759

Bad debts, net of recoveries
(207
)
47

69,848

65,276

OTHER INCOME (EXPENSE)
Interest expense
(18,322
)
(17,918
)
Impairment
(3,328
)
—

Interest and other income, net
91

100

(21,559
)
(17,818
)
INCOME FROM CONTINUING OPERATIONS
5,049

7,477

DISCONTINUED OPERATIONS
Income (loss) from discontinued operations
333

(89
)
Impairments
—

(3,425
)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
333

(3,514
)
NET INCOME
5,382

3,963

Less: Net income attributable to noncontrolling interests
—

(111
)
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
5,382

$
3,852

BASIC EARNINGS (LOSS) PER COMMON SHARE:
Income from continuing operations
$
0.05

$
0.08

Discontinued operations
0.00

(0.04
)
Net income attributable to common stockholders
$
0.05

$
0.04

DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Income from continuing operations
$
0.05

$
0.08

Discontinued operations
0.00

(0.04
)
Net income attributable to common stockholders
$
0.05

$
0.04

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING—BASIC
98,360

94,152

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING—DILUTED
99,137

95,585

DIVIDENDS DECLARED, PER COMMON SHARE, DURING THE PERIOD
$
0.30

$
0.30

The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 , are an integral part of these financial statements.

2

Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31, 2015 and 2014
(Dollars in thousands)
(Unaudited)
Three Months Ended March 31,
2015
2014
NET INCOME
$
5,382

$
3,963

Other comprehensive income (loss):
Income from noncontrolling interests
—

(111
)
Unrecognized loss on cash flow hedges
(723
)
—

Total other comprehensive loss
$
(723
)
$
(111
)
COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
4,659

$
3,852
























The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 , are an integral part of these financial statements.

3

Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2015 and 2014
(Dollars in thousands)
(Unaudited)
Three Months Ended March 31,
2015
2014
OPERATING ACTIVITIES
Net income
$
5,382

$
3,963

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
30,214

28,049

Stock-based compensation
1,617

1,516

Straight-line rent receivable
(2,858
)
(2,303
)
Straight-line rent liability
195

108

Impairments
3,328

3,425

Provision for bad debts, net
(208
)
47

Changes in operating assets and liabilities:
Other assets
(2,914
)
(3,087
)
Accounts payable and accrued liabilities
(18,989
)
(21,577
)
Other liabilities
1,337

(1,848
)
Net cash provided by operating activities
17,104

8,293

INVESTING ACTIVITIES
Acquisitions of real estate
(37,139
)
—

Development of real estate
(4,320
)
—

Acquisition of additional long-lived assets
(11,161
)
(15,882
)
Funding of mortgages and notes receivable
—

(798
)
Proceeds from acquisition of real estate upon mortgage note receivable default
—

204

Proceeds from mortgages and notes receivable repayments
5

4

Net cash used in investing activities
(52,615
)
(16,472
)
FINANCING ACTIVITIES
Net borrowings (repayments) on unsecured credit facility
57,000

(159,000
)
Borrowings on term loan
—

200,000

Repayments on notes and bonds payable
(16,468
)
(1,462
)
Dividends paid
(29,832
)
(28,802
)
Net proceeds from issuance of common stock
31,910

374

Common stock redemptions
(201
)
(227
)
Distributions to noncontrolling interest holders
—

(32
)
Debt issuance and assumption costs
—

(1,174
)
Net cash provided by financing activities
42,409

9,677

Increase in cash and cash equivalents
6,898

1,498

Cash and cash equivalents, beginning of period
3,519

8,671

Cash and cash equivalents, end of period
$
10,417

$
10,169

Supplemental Cash Flow Information:
Interest paid
$
25,313

$
25,153

Invoices accrued for construction, tenant improvement and other capitalized costs
$
4,247

$
6,988

The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 , are an integral part of these financial statements.

4
Healthcare Realty Trust Incorporated

Notes to Condensed Consolidated Financial Statements
March 31, 2015
(Unaudited)


Note 1. Summary of Significant Accounting Policies
Business Overview
Healthcare Realty Trust Incorporated (the “Company”) is a real estate investment trust that integrates owning, managing, financing and developing income-producing real estate properties associated primarily with the delivery of outpatient healthcare services throughout the United States. The Company had investments of approximately $3.3 billion in 199 real estate properties and mortgages as of March 31, 2015 . The Company’s 198 owned real estate properties are located in 30 states and total approximately 14.3 million square feet. The Company provided property management services to approximately 9.5 million square feet nationwide.

Basis of Presentation
The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. However, except as disclosed herein, management believes there has been no material change in the information disclosed in the Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2014 . All material intercompany transactions and balances have been eliminated in consolidation.

This interim financial information should be read in conjunction with the financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 . Management believes that all adjustments of a normal, recurring nature considered necessary for a fair presentation have been included. In addition, the interim financial information does not necessarily represent or indicate what the operating results will be for the year ending December 31, 2015 for many reasons including, but not limited to, acquisitions, dispositions, capital financing transactions, changes in interest rates and the effects of other trends, risks and uncertainties.

Use of Estimates in the Condensed Consolidated Financial Statements
Preparation of the Condensed Consolidated Financial Statements in accordance with GAAP requires management to make estimates and assumptions that affect amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Actual results may differ from those estimates.

Fair Value of Derivative Financial Instruments
Derivative financial instruments are recorded at fair value on the Company's Condensed Consolidated Balance Sheets as other assets or other liabilities. The valuation of derivative instruments requires the Company to make estimates and judgments that affect the fair value of the instruments. Fair values of derivatives are estimated by pricing models that consider the forward yield curves and discount rates. The fair value of the Company's forward exchange contracts are estimated by pricing models that consider foreign trade rates and discount rates. Such amounts and the recognition of such amounts are subject to significant estimates that may change in the future. See Note 4 for additional information.


5
Notes to Condensed Consolidated Financial Statements - Continued

New Accounting Pronouncements
Accounting Standards Update No. 2015-03
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs." This standard requires debt issuance costs to be reported in the balance sheet as a direct reduction from the face amount of the note in which it is directly related.

This standard is effective for the Company beginning on January 1, 2016 with early adoption permitted, on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, the Company is required to comply with the applicable disclosures for a change in an accounting principle. The Company does not expect the adoption of this standard to have a material impact on the Company's consolidated financial position or cash flows.

Accounting Standards Update No. 2014-08
In April 2014, the FASB issued ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This standard changes the requirements for reporting discontinued operations by raising the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations, and certain other disposals that do not meet the definition of a discontinued operation. The standard limits discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results.

This standard is effective for the Company on a prospective basis for annual periods beginning on January 1, 2015 and interim periods within that year. Early adoption was permitted but only for disposals (or classifications as held for sale) that had not been reported in financial statements previously issued. The Company adopted this standard on the effective date of January 1, 2015 and does not expect it to have a material impact on the Company's consolidated financial position or cash flows, but it could have a material impact on the presentation of the Consolidated Statement of Operations.
Accounting Standards Update No. 2014-09
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers", a comprehensive new revenue recognition standard that supersedes most existing revenue recognition guidance, including sales of real estate. This standard's core principle is that a company will recognize revenue when it transfers goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods and services. However, leasing contracts, representing the major source of the Company's revenues, are not within the scope of the new standard and will continue to be accounted for under existing standards.

This new standard is effective for the Company for annual and interim periods beginning on January 1, 2017 with early adoption prohibited. However, the FASB issued an exposure draft on April 29, 2015 that would defer the effective date one year. The Company has not yet determined the effects on the Consolidated Financial Statements and related notes resulting from the adoption of this new standard.

Reclassifications
Certain amounts in the Company’s Condensed Consolidated Balance Sheets have been reclassified for the current period presentation of assets held for sale and related liabilities.

Note 2. Real Estate Investments
2015 Acquisition
In January 2015, the Company acquired a 110,679 square foot medical office building in California for a purchase price and cash consideration of $39.3 million . The property is located adjacent to two hospital campuses, Kaiser Permanente, a 106-bed hospital, and Washington Hospital Healthcare System, a 353-bed hospital. Upon acquisition, this property was 97% leased, with leases to the two hospitals comprising 59% of the rentable square footage.





6
Notes to Condensed Consolidated Financial Statements - Continued

Assets Held for Sale
During the first quarter of 2015, the Company reclassified one off-campus medical office building to held for sale in connection with management's decision to sell the property. The Company expects that the property will be sold during 2015. The Company recorded an impairment charge of $3.3 million to record the property at estimated fair value less costs to sell, which was based on a purchase and sale agreement, a level 3 input, that was subsequently terminated. At March 31, 2015 and December 31, 2014 , the Company had three and two properties classified as held for sale, respectively.

The table below reflects the assets and liabilities of the properties classified as held for sale as of March 31, 2015 and December 31, 2014 .
(Dollars in thousands)
March 31,
2015
December 31,
2014
Balance Sheet data:
Land
$
2,524

$
422

Buildings, improvements and lease intangibles
21,513

12,822

Personal property
21

13

24,058

13,257

Accumulated depreciation
(10,322
)
(4,464
)
Assets held for sale, net
13,736

8,793

Other assets, net (including receivables)
428

353

Assets of discontinued operations, net
428

353

Assets held for sale and discontinued operations, net
$
14,164

$
9,146

Accounts payable and accrued liabilities
$
93

$
86

Other liabilities
9

286

Liabilities of discontinued operations
$
102

$
372



7
Notes to Condensed Consolidated Financial Statements - Continued

Discontinued Operations
The Company adopted Accounting Standards Update No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” during the first quarter of 2015. As of December 31, 2014, the Company had two properties classified as held for sale and recorded in discontinued operations. These two properties will remain classified as discontinued operations until the properties are sold. During the three months ended March 31, 2015, the Company reclassified a property to held for sale upon management's decision to sell the property that did not meet the amended criteria as a discontinued operation. Therefore, the operating results of the property is not included in the table below which reflects the results of operations of the properties included in discontinued operations on the Company's Condensed Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014 .
Three Months Ended March 31,
(Dollars in thousands)
2015
2014
Statements of Operations data:
Revenues
Rental income
$
341

$
1,585

Other Operating Income
—

1

341

1,586

Expenses
Property operating
29

1,113

General and administrative
—

7

Depreciation
—

555

Bad debts, net of recoveries
(1
)
—

28

1,675

Other Income (Expense)
Interest and other income, net
20

—

20

—

Discontinued Operations
Income (loss) from discontinued operations
333

(89
)
Impairments
—

(3,425
)
Income (Loss) from Discontinued Operations
$
333

$
(3,514
)

Note 3. Notes and Bonds Payable
First Quarter
In January 2015, the Company repaid in full a secured loan from Wells Fargo Commercial Mortgage bearing an interest rate of 5.45% consisting of outstanding principal of $15.0 million and accrued interest as of the redemption date of $0.1 million .

Subsequent Activity
On April 1, 2015 , the Company repaid in full a secured loan from Wells Fargo Commercial Mortgage bearing an interest rate of 5.0% consisting of principal of $10.2 million .

On April 24, 2015 , the Company issued $250.0 million of unsecured senior notes due 2025 (the "Senior Notes due 2025") in a registered public offering. The Senior Notes due 2025 bear interest at 3.875% , payable semi-annually on May 1 and November 1 , beginning November 1, 2015 , and are due on May 1, 2025 , unless redeemed earlier by the Company. The notes were issued at a discount of approximately $0.2 million , which yielded a 3.885% interest rate per annum upon issuance. The Company incurred approximately $2.1 million in debt issuance costs that are included in Other assets, which will be amortized to maturity using the effective interest method. See Note 4 for discussion regarding the concurrent termination of the four forward starting interest rate swaps and related impact. The Senior Notes due 2025 have various financial covenants that are required to be met on a quarterly and annual basis.


8
Notes to Condensed Consolidated Financial Statements - Continued

Also in April 2015 , the Company issued a notice of its intent to redeem its unsecured senior notes due 2017 on May 15, 2015 at a redemption price equal to an aggregate of $333.2 million , consisting of outstanding principal of $300.0 million , accrued interest of $6.4 million , and a "make-whole" amount of approximately $26.8 million for the early extinguishment of debt. The unaccreted discount and unamortized costs on these notes of $1.2 million will be written off upon redemption. In the second quarter of 2015, the Company expects to recognize a loss on early extinguishment of debt of approximately $28.0 million related to this redemption.

On May 4, 2015 , the Company repaid in full a mortgage note payable bearing an interest rate of 5.41% consisting of outstanding principal of $16.3 million and accrued interest as of the redemption date of $0.1 million .

Note 4. Derivative Financial Instruments
Risk Management Objective of Using Derivatives
In addition to operational risks which arise in the normal course of business, the Company is exposed to economic risks such as interest rate, liquidity, and credit risk. In certain situations, the Company may enter into derivative financial instruments such as interest rate swap and interest rate cap agreements to manage interest rate risk exposure arising from variable rate debt transactions that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company's objective in using interest rate derivatives is to manage its exposure to interest rate movements.

Cash Flow Hedges of Interest Rate Risk
Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without changing the underlying notional amount.

During the three months ended March 31, 2015, the Company entered into two forward starting interest rate swaps with a total notional value of $125.0 million to hedge the risk of changes in the interest-related cash flows associated with the potential issuance of long-term debt that was issued in April 2015 as discussed in Note 3. The Company was hedging its exposure to the variability in future cash flows for forecasted transactions. As of March 31, 2015, the Company had hedged $125.0 million associated with the potential incurrence of long-term debt.

A detail of the Company's interest rate derivatives outstanding as of March 31, 2015 is as follows (in thousands):

Interest Rate Derivative
Notional Amount

Interest Rate Swaps
$
125,000


The Company has elected to present its interest rate derivatives on its Condensed Consolidated Balance Sheets on a gross basis as interest rate swap assets and interest rate swap liabilities. A detail of the Company's fair value of interest rate derivatives on a gross and net basis as of March 31, 2015 is as follows (in thousands):

Interest Rate Swaps Classified as:
Fair Value of Derivative Instruments

Gross derivative liabilities
$
(723
)
Derivative liability
$
(723
)

All of the Company's interest rate swap agreements outstanding for the three months ended March 31, 2015 were designated as cash flow hedges of interest rate risk. The effective portion of the changes in fair value of derivatives designated as, and that qualify as, cash flow hedges is recorded in other comprehensive income (loss) ("OCI") and will be reclassified into earnings as interest expense in the period that the hedged forecasted transaction affects earnings.


9
Notes to Condensed Consolidated Financial Statements - Continued

The following presents the impacts of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 (in thousands):

Location
For the Three Months Ended March 31, 2015

Loss on forward starting interest rate swap agreements recognized in OCI
OCI
$
723


The Company estimates that an additional $0.2 million will be reclassified from accumulated other comprehensive loss as an increase to interest expense over the next 12 months. No gain or loss was recognized related to hedge ineffectiveness or to amounts excluded from effectiveness testing on the Company's cash flow hedges during the three months ended March 31, 2015.

Credit-risk-related Contingent Features
The Company has agreements with its derivative counterparties that contain a provision whereby if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. If the Company were to breach any of the contractual provisions of the derivative contracts, it would be required to settle its obligations under the agreements at their termination value including accrued interest, or approximately $0.7 million at March 31, 2015. Additionally, the Company does have rights of set-off under certain of its derivative agreements related to potential termination fees and amounts payable under the agreements, if a termination were to occur.

Subsequent Activity
On April 1 and April 3, 2015, the Company entered into two forward starting swap agreements with a total notional value of $62.5 million and $37.5 million , respectively.

On April 24, 2015 and in conjunction with the Company's issuance of the Senior Notes due 2025, the Company settled the four previously outstanding forward starting swap agreements for a loss of approximately $1.7 million . The loss was recorded as accumulated other comprehensive income and is being amortized as additional interest expense over the ten -year term of the Senior Notes due 2025 resulting in an effective interest rate of 3.97% . The Company classifies cash flows from the settlement of hedging derivative instruments in the same category as the underlying exposure which is being hedged. As the cash settlement of approximately $1.7 million was the result of hedging the Company's exposure to interest rate changes and their effect on interest expense, such cash settlement is classified as an operating cash flow in the accompanying consolidated statements of cash flows. See Note 3 for more information on the bond issuance.

Note 5. Commitments and Contingencies
Legal Proceedings
The Company is, from time to time, involved in litigation arising in the ordinary course of business or which is expected to be covered by insurance. 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.

Redevelopment Activity
The Company is in the process of redeveloping two properties in Tennessee and will begin constructing an expansion of one of the buildings beginning in the second quarter of 2015. The Company has spent approximately $9.4 million toward these projects through March 31, 2015, including the acquisition of a land parcel for $4.3 million on which the Company intends to build a parking garage. The total estimated budget of the redevelopment of these properties is expected to be $47.8 million and the project is expected to be completed near the end of 2016.

The Company will commence redevelopment of a property in Alabama, which will include building a parking garage. Construction is expected to begin in the second quarter of 2015. The total redevelopment budget is $15.4 million , of which $1.5 million has b een spent as of March 31, 2015. Construction is expected to be completed at the beginning of 2016.



10
Notes to Condensed Consolidated Financial Statements - Continued

Note 6. Stockholders' Equity
The following table provides a reconciliation of total stockholders' equity for the three months ended March 31, 2015 :
(Dollars in thousands, except per share data)
Common
Stock
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Loss
Cumulative
Net
Income Attributable to Common Stockholders
Cumulative
Dividends
Total
Stockholders’
Equity
Balance at December 31, 2014
$
988

$
2,389,830

$
(2,519
)
$
840,249

$
(2,007,494
)
$
1,221,054

Issuance of common stock
12

31,876

—

—

—

31,888

Common stock redemptions
—

(201
)
—

—

—

(201
)
Stock-based compensation
1

1,616

—

—

—

1,617

Net income
—

—

—

5,382

—

5,382

Loss on forward starting interest rate swaps
—

—

(723
)
—

—

(723
)
Dividends to common stockholders ($0.30 per share)
—

—

—

—

(29,832
)
(29,832
)
Balance at March 31, 2015
$
1,001

$
2,423,121

$
(3,242
)
$
845,631

$
(2,037,326
)
$
1,229,185


The following table discloses changes in the balances of each component of accumulated comprehensive loss for the three months ended March 31, 2015 :
Forward-starting Interest Rate Swaps
Defined Benefit Pension Plans
Accumulated Other Comprehensive Loss
Beginning balance
$
—

$
(2,519
)
$
(2,519
)
Current-period other comprehensive loss
(723
)
—

(723
)
Ending balance
$
(723
)
$
(2,519
)
$
(3,242
)

Common Stock
The following table provides a reconciliation of the beginning and ending shares of common stock outstanding for the three months ended March 31, 2015 and the year ended December 31, 2014:
March 31, 2015
December 31, 2014
Balance, beginning of period
98,828,098

95,924,339

Issuance of common stock
1,176,702

3,073,445

Nonvested share-based awards, net
81,786

(169,686
)
Balance, end of period
100,086,586

98,828,098


At-The-Market Equity Offering Program
During the three months ended March 31, 2015 , the Company sold 1,140,362 shares of common stock under its at-the-market equity offering program, generating $31.2 million in net proceeds at prices ranging from $26.35 to $29.15 per share (weighted average of $27.78 per share). In April 2015, the Company sold 304,752 shares of common stock, generating $8.3 million in net proceeds at prices ranging from $27.04 to $28.00 per share (weighted average of $27.77 per share). The Company's existing sales agreements with four investment banks allow sales under this program of up to 9,000,000 shares of common stock, with 936,525 authorized shares remaining available to be sold under the these agreements as of May 1, 2015 .

Common Stock Dividends
During the first three months of 2015 , the Company declared and paid common stock dividends totaling $0.30 per share. On May 5, 2015, the Company declared a quarterly common stock dividend in the amount of $0.30 per share payable on May 29, 2015 to stockholders of record on May 18, 2015.


11
Notes to Condensed Consolidated Financial Statements - Continued

Earnings (Loss) Per Common Share
The following table sets forth the computation of basic and diluted earnings (loss) per common share for the three months ended March 31, 2015 and 2014 .
Three Months Ended March 31,
(Dollars in thousands, except per share data)
2015
2014
Weighted average Common Shares outstanding
Weighted average Common Shares outstanding
99,467,804

96,009,788

Nonvested shares
(1,107,846
)
(1,857,536
)
Weighted average Common Shares outstanding—Basic
98,359,958

94,152,252

Weighted average Common Shares—Basic
98,359,958

94,152,252

Dilutive effect of restricted stock
615,511

1,299,287

Dilutive effect of employee stock purchase plan
161,428

133,893

Weighted average Common Shares outstanding—Diluted
99,136,897

95,585,432

Net Income (Loss)
Income from continuing operations
$
5,049

$
7,477

Noncontrolling interests’ share in net loss
—

(111
)
Income from continuing operations attributable to common stockholders
5,049

7,366

Discontinued operations
333

(3,514
)
Net income attributable to common stockholders
$
5,382

$
3,852

Basic Earnings (Loss) Per Common Share
Income from continuing operations
$
0.05

$
0.08

Discontinued operations
0.00

(0.04
)
Net income attributable to common stockholders
$
0.05

$
0.04

Diluted Earnings (Loss) Per Common Share
Income from continuing operations
$
0.05

$
0.08

Discontinued operations
0.00

(0.04
)
Net income attributable to common stockholders
$
0.05

$
0.04


Incentive Plans
The Company has various stock-based incentive plans for its employees and directors. Awards under these plans include nonvested common stock issued to employees and the Company’s directors. During the three months ended March 31, 2015 and 2014 , the Company issued 89,068 and 101,522 shares of nonvested common stock, respectively, to participants under these incentive plans and withheld 7,282 and 9,974 shares of common stock, respectively, from participants to pay estimated withholding taxes related to shares that vested.

A summary of the activity under the stock-based incentive plans for the three months ended March 31, 2015 and 2014 is included in the table below.
Three Months Ended March 31,
2015
2014
Stock-based awards, beginning of period
1,057,732

1,788,168

Granted
89,068

101,522

Vested
(28,386
)
(34,365
)
Stock-based awards, end of period
1,118,414

1,855,325


The Company recorded approximately $0.2 million in general and administrative expenses during the first quarter of 2015 relating to the annual grant of options to its employees under the Employee Stock Purchase Plan based on the Company's estimate of option exercises.


12
Notes to Condensed Consolidated Financial Statements - Continued

A summary of the activity under the Employee Stock Purchase Plan for the three months ended March 31, 2015 and 2014 is included in the table below.
Three Months Ended March 31,
2015
2014
Outstanding and exercisable, beginning of period
393,902

391,108

Granted
197,640

275,655

Exercised
(33,046
)
(18,502
)
Forfeited
(20,779
)
(22,426
)
Expired
(158,946
)
(157,875
)
Outstanding and exercisable, end of period
378,771

467,960


Note 7. Defined Benefit Pension Plan
The Company’s Executive Retirement Plan provides benefits upon retirement for three of the Company’s founding officers. The plan is unfunded and benefits will be paid from cash flows of the Company. The maximum annual benefits payable to each individual under the Executive Retirement Plan is $0.9 million , subject to cost-of-living adjustments. As of March 31, 2015 , only the Company’s Chief Executive Officer was eligible to retire under the Executive Retirement Plan.

Net periodic benefit cost recorded related to the Company’s pension plan for the three months ended March 31, 2015 and 2014 is detailed in the following table.
Three Months Ended March 31,
(Dollars in thousands)
2015
2014
Service cost
$
21

$
22

Interest cost
169

172

Amortization of net gain (loss)
(149
)
117

Amortization of prior service cost
258

(297
)
Total recognized in net periodic benefit cost
$
299

$
14


Subsequent Activity
Effective May 5, 2015, the Company terminated its Executive Retirement Plan. The Company will settle benefits under the plan by paying the plan participants lump sum amounts. In accordance with Section 409A of the Internal Revenue Code, these amounts will be paid no earlier than twelve and no later than twenty-four months following the termination date. The Second Amendment to the Second Amended and Restated Executive Retirement Plan (the “Termination Amendment”), which provides for the termination of the plan, is filed with this Quarterly Report on Form 10-Q as Exhibit 10.1. Additional information regarding the Executive Retirement Plan can be found in the Company’s proxy statement filed with the Securities and Exchange Commission in connection with the Company’s annual meeting of shareholders to be held on May 12, 2015.
At March 31, 2015, the Company recognized a total benefit obligation of $16.8 million in connection with the Executive Retirement Plan. The Company expects the total costs associated with the termination of the Executive Retirement Plan to be approximately $19.6 million and that it will record a current period charge in the second quarter of 2015 of approximately $5.3 million , inclusive of the acceleration of $2.5 million recorded in accumulated other comprehensive income (loss) on the consolidated balance sheet that was being amortized. The charge includes amounts resulting from assumed additional years of service for plan participants who have not reached age 65 and payments associated with FICA and other tax obligations.
The Company’s chairman and chief executive officer, Mr. David Emery, is the only named executive officer that is a participant under the plan. As a result of the termination, Mr. Emery will receive a lump sum amount equal to his accrued benefit under the plan of approximately $14.4 million . The Company expects that Mr. Emery and the other officer participants will take the settlement payments in Company stock, but can elect to receive cash.
The preceding summary is qualified in its entirety by the full text of the Termination Amendment and, in the event of any discrepancy, the text of the Termination Amendment shall control.

13
Notes to Condensed Consolidated Financial Statements - Continued

Note 8. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practical to estimate that value.

Cash and cash equivalents - The carrying amount approximates fair value.

Mortgage notes receivable - The fair value of mortgage notes receivable is estimated based either on cash flow analyses at an assumed market rate of interest or at a rate consistent with the rates on mortgage notes acquired by the Company recently.

Borrowings under the unsecured credit facility due 2017 - The carrying amount approximates fair value because the borrowings are based on variable interest rates.

Senior unsecured notes payable - The fair value of notes and bonds payable is estimated using cash flow analyses, based on the Company’s current interest rates for similar types of borrowing arrangements.

Mortgage notes payable - The fair value is estimated using cash flow analyses, based on the Company’s current interest rates for similar types of borrowing arrangements.

Interest rate swap agreements - Interest rate swap agreements are recorded in other liabilities on the Company's Condensed Consolidated Balance Sheets at fair value. Fair value is estimated by utilizing pricing models that consider forward yield curves and discount rates.

The table below details the fair values and carrying values for notes and bonds payable, mortgage notes receivable and interest rate swaps at March 31, 2015 and December 31, 2014 .
March 31, 2015
December 31, 2014
(Dollars in millions)
Carrying Value
Fair Value
Carrying Value
Fair Value
Notes and bonds payable (1)
$
1,444.6

$
1,487.5

$
1,403.7

$
1,438.8

Mortgage notes receivable (2)
$
1.9

$
1.9

$
1.9

$
1.9

Interest rate swaps (2)
$
0.7

$
0.7

$
—

$
—

______
(1) Level 3 - Fair value derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
(2) Level 2 - Fair value based on quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets.



14

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Disclosure Regarding Forward-Looking Statements
This report and other materials the Company has filed or may file with the Securities and Exchange Commission, as well as information included in oral statements or other written statements made, or to be made, by 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, including the risks, as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, that could significantly affect the Company’s current plans and expectations and future financial condition and results.

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.

For a detailed discussion of the Company’s risk factors, please refer to the Company’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2014 .

The purpose of this Management's Discussion and Analysis ("MD&A") is to provide an understanding of the Company's consolidated financial condition, results of operations and cash flows by focusing on the changes in certain key measures from year to year. MD&A is provided as a supplement to, and should be read in conjunction with, the Company's Condensed Consolidated Financial Statements and accompanying notes. MD&A is organized in the following sections:

•
Liquidity and Capital Resources
•
Trends and Matters Impacting Operating Results
•
Results of Operations

Liquidity and Capital Resources
Sources and Uses of Cash
The Company’s primary sources of cash include rent and interest receipts from its real estate and mortgage portfolio based on contractual arrangements with its tenants, sponsors and borrowers, borrowings under the unsecured credit facility due 2017 ("Unsecured Credit Facility"), proceeds from the sales of real estate properties, the repayment of mortgage notes receivable, and proceeds from public or private debt or equity offerings.

The Company expects to continue to meet its liquidity needs, including funding additional investments, paying dividends, and funding debt service through cash on hand, cash flows from operations, and the cash flow sources described above. The Company had unencumbered real estate assets with a gross book value of approximately $2.9 billion at March 31, 2015 , 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.

Dividends paid by the Company for the three months ended March 31, 2015 were funded from cash flows from operations and the Unsecured Credit Facility, as cash flows from operations were not adequate to fully fund dividends paid at the rate per quarter of $0.30 per common share. The Company expects that additional cash flows from existing properties, acquisitions and continued lease-up of the development conversion properties will generate sufficient cash flows from operations such that dividends for the full year 2015 can be funded by cash flows from operations.

Investing Activities
Cash flows used in investing activities for the three months ended March 31, 2015 were approximately $52.6 million . Below is a summary of the significant investing activities.

•
In January 2015, the Company acquired a 110,679 square foot medical office building in California for a purchase price and cash consideration of $39.3 million . The property is located adjacent to two hospital campuses, Kaiser Permanente, a 106-bed hospital, and Washington Hospital Healthcare System, a 353-bed hospital. Upon acquisition, this property was 97% leased, with leases to the two hospitals comprising 59% of the rentable square footage.

15


•
The Company is in the process of redeveloping two properties in Tennessee and will begin constructing an expansion of one of the buildings beginning in the second quarter of 2015. The Company has spent approximately $9.4 million toward these projects through March 31, 2015, including the acquisition of a land parcel for $4.3 million on which the Company intends to build a parking garage. The total estimated budget of the redevelopment of these properties is expected to be $47.8 million and the project is expected to be completed near the end of 2016.

•
The Company is in the process of redeveloping a property in Alabama, which will include building a parking garage. The total redevelopment budget is $15.4 million, of which $1.5 million has been spent as of March 31, 2015. Construction is expected to be completed at the beginning of 2016.

Financing Activities
Cash flows provided by financing activities for the three months ended March 31, 2015 were approximately $42.4 million . Inflows from accessing the debt and equity markets totaled $88.9 million, net of costs incurred. Aggregate cash outflows totaled approximately $46.5 million primarily associated with dividends paid to common stockholders and repayments of indebtedness. See Notes 3 and 6 to the Condensed Consolidated Financial Statements for more information on capital markets and financing activities.

Changes in Debt Structure
In January 2015, the Company repaid in full a secured loan from Wells Fargo Commercial Mortgage bearing an interest rate of 5.45% consisting of outstanding principal of $15.0 million and accrued interest as of the redemption date of $0.1 million .

As of March 31, 2015 , the Company's outstanding balance on the Unsecured Credit Facility was $142.0 million, with a remaining borrowing capacity of approximately $558.0 million. The Company’s leverage ratio [debt divided by (debt plus stockholders’ equity less intangible assets plus accumulated depreciation)] was approximately 42.6%.

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 minimum tangible net worth, and impose certain limits on the Company’s ability to incur indebtedness and create liens or encumbrances. At March 31, 2015 , the Company was in compliance with the financial covenant provisions under all of its various debt instruments.

Subsequent Activity
On April 1, 2015 , the Company repaid in full a secured loan from Wells Fargo Commercial Mortgage bearing an interest rate of 5.0% consisting of principal of $10.2 million .

On April 24, 2015 , the Company issued $250.0 million of unsecured senior notes due 2025 (the "Senior Notes due 2025") in a registered public offering. The Senior Notes due 2025 bear interest at 3.875% , payable semi-annually on May 1 and November 1 , beginning November 1, 2015 , and are due on May 1, 2025 , unless redeemed earlier by the Company. The notes were issued at a discount of approximately $0.2 million , which yielded a 3.885% interest rate per annum upon issuance. The Company incurred approximately $2.1 million in debt issuance costs that are included in Other assets, which will be amortized to maturity. Concurrent with this transaction, the Company settled four forward starting swap agreements and paid $1.7 million. The Senior Notes due 2025 have various financial covenants that are required to be met on a quarterly and annual basis.

Also in April 2015 , the Company issued a notice of its intent to redeem its unsecured senior notes due 2017 on May 15, 2015 at a redemption price equal to an aggregate of $333.2 million , consisting of outstanding principal of $300.0 million , accrued interest of $6.4 million , and a "make-whole" amount of approximately $26.8 million for the early extinguishment of debt. The unaccreted discount and unamortized costs on these notes of $1.2 million will be written off upon redemption. In the second quarter of 2015, the Company expects to recognize a loss on early extinguishment of debt of approximately $28.0 million related to this redemption.

On May 4, 2015 , the Company repaid in full a mortgage note payable bearing an interest rate of 5.41% consisting of outstanding principal of $16.3 million and accrued interest as of the redemption date of $0.1 million .




16

Common Stock Issuances
During the three months ended March 31, 2015 , the Company sold 1,140,362 shares of common stock under its at-the-market equity offering program, generating $31.2 million in net proceeds at prices ranging from $26.35 to $29.15 per share (weighted average of $27.78 per share). In April 2015 the Company sold 304,752 shares of common stock, generating $8.3 million in net proceeds at prices ranging from $27.04 to $28.00 per share (weighted average of $27.77 per share). The Company's existing sales agreements with four investment banks allow sales under this program of up to 9,000,000 shares of common stock, with 936,525 authorized shares remaining available to be sold under the these agreements as of May 1, 2015 .

Operating Activities
Cash flows provided by operating activities increased from $8.3 million for the three months ended March 31, 2014 to $17.1 million for the three months ended March 31, 2015 . Several items impact cash flows from operations 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 receipts of tenant rent.
The Company may from time to time sell additional properties and redeploy cash from property sales and mortgage repayments into new investments. To the extent revenues related to the properties being sold and the mortgages being repaid exceed income from these new investments, the Company's results of operations and cash flows could be adversely affected.

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 the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

New Accounting Pronouncements
See Note 1 to the Company's Condensed Consolidated Financial Statements accompanying this report for information on new accounting standards not yet adopted. The Company is still evaluating the impact of these new standards.

Trends and Matters Impacting Operating Results
Management monitors factors and trends important to the Company and the REIT industry to gauge the potential impact on the operations of the Company. In addition to the matters discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 , below are some of the factors and trends that management believes may impact future operations of the Company.

Expiring Leases
The Company expects that approximately 15% to 20% of the leases in its multi-tenanted portfolio will expire each year in the ordinary course of business. There are 411 leases that have expired, or will expire during 2015 including those in holdover. Approximately 89% of the leases expiring in 2015 are located in buildings on hospital campuses, are distributed throughout the portfolio and are not concentrated with any one tenant, health system or market area. The Company typically expects 75% to 90% of multi-tenant property leases to renew upon expiration, and the renewals for the first three months of the year are within this range.

Operating Expenses
The Company has experienced and expects continued increases in property taxes throughout its portfolio as a result of increasing assessments and tax rates levied across the country. The Company continues its efforts to appeal property tax increases and manage the impact of the increases. In addition, the Company has historically incurred variability in portfolio utilities expense based on seasonality with the first and third quarters usually reflecting greater amounts. The effects of these operating expense increases are mitigated in leases that have provisions for operating expense reimbursement. As of March 31, 2015 , 83% of the Company's multi-tenant leased square footage allows for some recovery of operating expenses, with 50% recovering all allowable expenses.

Termination of Defined Benefit Plan
The Company has had a defined benefit pension plan, referred to elsewhere in this report as the "Executive Retirement Plan" since its inception that provides benefits for three founding officers and the surviving spouse of another founding officer. No participants have been added to the plan since 1994. The plan is subject to non-cash valuation fluctuations each year based on changes in mortality assumptions and changing discount rates. Given these fluctuations and the applicability of the plan to only a small number of Company employees, the Company has decided to terminate the plan to eliminate a level of volatility and uncertainty to the Company’s financial results. See Note 7 in this Form 10-Q for additional information regarding the plan termination and the future payments of benefits to the plan participants.

17


Non-GAAP Financial Measures
Management believes that net income, as defined by GAAP, is the most appropriate earnings measurement. However, management considers certain non-GAAP financial measures 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 historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. 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 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 (determined in accordance with GAAP), as indicators of the Company's financial performance, or as alternatives to cash flow from operating activities (determined in accordance with GAAP) 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 consolidated historical operating results, these measures should be examined in conjunction with net income as presented in the Condensed Consolidated Financial Statements and other financial data included elsewhere in this report.

Funds from Operations
Funds from operations (“FFO”) and FFO per share are operating performance measures adopted by the National Association of Real Estate Investment Trusts, Inc. (“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 related to real estate properties, and after adjustments for unconsolidated partnerships and joint ventures.” The Company follows the NAREIT definition in calculating and presenting FFO and FFO per share.

Management believes FFO and FFO per share to be supplemental measures of a REIT’s performance because they 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 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, FFO and FFO per share can facilitate comparisons of operating performance between periods. The Company reports FFO and FFO per share 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 and because FFO per share is consistently reported, discussed, and compared by research analysts in their notes and publications about REITs. For these reasons, management has deemed it appropriate to disclose and discuss FFO and FFO per share. However, FFO does not represent cash generated from operating activities determined in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs. FFO should not be considered as an alternative to net income attributable to common stockholders as an indicator of the Company’s operating performance or as an alternative to cash flow from operating activities as a measure of liquidity.

FFO for the three months ended March 31, 2015 compared to the same period in 2014 was primarily impacted by the various acquisitions and dispositions during the period, the effects of capital market transactions and the results of operations of the portfolio from period to period.


18

The table below reconciles FFO to net income attributable to common stockholders for the three months ended March 31, 2015 and 2014 :
Three Months Ended March 31,
(Amounts in thousands, except per share data)
2015
2014
Net Income Attributable to Common Stockholders
$
5,382

$
3,852

Impairments
3,328

3,425

Real estate depreciation and amortization
28,532

26,248

Total adjustments
31,860

29,673

Funds from Operations
$
37,242

$
33,525

Funds from Operations per Common Share—Basic
$
0.38

$
0.36

Funds from Operations per Common Share—Diluted
$
0.38

$
0.35

Weighted Average Common Shares Outstanding—Basic
98,360

94,152

Weighted Average Common Shares Outstanding—Diluted
99,137

95,585


Same Store Net Operating Income
Net operating income ("NOI") and same store NOI are non-GAAP historical financial measures of performance. 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 straight-line rent, 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. Same store NOI is historical and not necessarily indicative of future results.

The following table reflects the Company's same store NOI for the three months ended March 31, 2015 and 2014 .

Same Store NOI for the
Three Months Ended March 31,
(Dollars in thousands)
Number of Properties (1)
Investment at March 31, 2015
2015
2014
Multi-tenant Properties
129

$
2,017,988

$
35,348

$
33,087

Single-tenant Net Lease Properties
33

504,370

12,757

12,166

Total
162

$
2,522,358

$
48,105

$
45,253

___________
(1) Mortgage notes receivable, reposition properties, corporate property and assets classified as held for sale are excluded.

Properties included in the same store analysis are stabilized properties that have been included in operations and are consistently reported as leased and stabilized properties for the duration of the year-over-year comparison period presented. Accordingly, properties that were recently acquired or disposed of, properties classified as held for sale are excluded from the same store analysis. In addition, the Company excludes properties that have less than 60% occupancy or that experience a loss of occupancy over 30% in a single quarter that is expected to continue for a period of at least two quarters.






19

The following tables reconcile same store NOI to the respective line items in the Condensed Consolidated Statements of Operations and the same store property count to the total owned real estate portfolio:
Reconciliation of Same Store NOI:
Three Months Ended March 31,
(Dollars in thousands)
2015
2014
Rental income
$
95,034

$
86,502

Rental lease guaranty income (a)
1,102

1,141

Property operating expense
(34,263
)
(32,831
)
Exclude Straight-line rent revenue (b)
(2,832
)
(2,297
)
NOI
59,041

52,515

NOI not included in same store
(10,936
)
(7,262
)
Same store NOI
$
48,105

$
45,253

___________

(a) Other operating income reconciliation:
Rental lease guaranty income
$
1,102

$
1,141

Interest income
157

192

Management fee income
78

64

Other
54

51

$
1,391

$
1,448

(b) Rental income reconciliation:
Property operating
$
74,654

$
69,274

Single-tenant net lease
17,548

14,931

Straight-line rent
2,832

2,297

$
95,034

$
86,502


Reconciliation of Same Store Property Count:
Property Count as of March 31, 2015
Same Store Properties
162

Acquisitions
18

Reposition
18

Total Owned Real Estate Properties
198



20

Results of Operations
Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014
The Company’s results of operations for the three months ended March 31, 2015 compared to the same period in 2014 were significantly impacted by acquisitions, dispositions, impairments recorded, gains on sales of real estate, capital markets transactions and changes due to the Company's adoption of Accounting Standards Update ("ASU") No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.”

Revenues
Rental income increased $8.5 million , or 9.9% , to approximately $95.0 million for the three months ended March 31, 2015 compared to $86.5 million in the prior year period and is comprised of the following:
Three Months Ended March 31,
Change
(Dollars in thousands)
2015
2014
$
%
Property operating
$
74,654

$
69,274

$
5,380

7.8
%
Single-tenant net lease
17,548

14,931

2,617

17.5
%
Straight-line rent
2,832

2,297

535

23.3
%
Total rental income
$
95,034

$
86,502

$
8,532

9.9
%

Property operating income increased $5.4 million , or 7.8% , from the prior year period as a result of the following activity:

•
Acquisitions in 2014 and 2015 contributed $4.1 million.
•
Leasing activity including contractual rent increases contributed $1.4 million.
•
Conversion from single-tenant net lease caused an increase of $0.2 million.
•
Conversion to single-tenant net lease caused a decrease of $0.3 million.

Single-tenant net lease revenue increased $2.6 million , or 17.5% , from the prior year period as a result of the following activity:

•
The Company's 2014 acquisitions contributed $1.8 million.
•
Leasing activity including contractual rent increases contributed $0.8 million.
•
Conversion to property operating income caused a decrease of $0.4 million.
•
Conversion from property operating income caused an increase of $0.5 million.

Straight-line rent increased $0.5 million , or 23.3% , from the prior year period primarily as a result of the Company's 2014 and 2015 acquisitions.

Mortgage interest income decreased $2.6 million , or 98.8% , from the prior year period as a result of the following activity:

•
Mortgage interest income decreased approximately $1.0 million related to a mortgage note receivable that the Company received a deed in lieu of foreclosure during the first quarter of 2014.
•
The Company's 2014 acquisition of a property in Oklahoma affiliated with Mercy Health previously funded under a construction mortgage note receivable resulted in a decrease of $1.5 million.
•
Other payoffs, offset by fundings, resulted in a decrease of $0.1 million.

Expenses
Property operating expenses increased $1.4 million , or 4.4% , for the three months ended March 31, 2015 compared to the prior year period primarily as a result of the Company's 2014 and 2015 acquisitions.

General and administrative expenses increased approximately $0.8 million , or 12.8% , for the three months ended March 31, 2015 compared to the prior year period primarily due to non-cash compensation-related expenses of $0.7 million.

21

Depreciation expense increased $2.7 million , or 11.5% , for the three months ended March 31, 2015 compared to the prior year period. Properties acquired in 2014 and 2015 contributed an increase of $1.9 million. The remaining $0.8 million increase is related to various building and tenant improvement expenditures.
Other income (expense)
Interest expense increased $0.4 million for the three months ended March 31, 2015 compared to the prior year period. The components of interest expense are as follows:
(Dollars in thousands)
2015
2014
Change

Percentage Change

Contractual interest
$
17,203

$
16,919

$
284

1.7
%
Net discount/premium accretion
331

244

87

35.7
%
Deferred financing costs amortization
788

755

33

4.4
%
Total interest expense
$
18,322

$
17,918

$
404

2.3
%

Contractual interest increased $0.3 million primarily due to the Unsecured Credit Facility and unsecured term loan due 2019.
In 2015, the Company recorded an impairment charge on a property that was reclassified to held for sale due to management's decision to sell to adjust the carrying value to fair value less costs to sell. The impairment charge is included in Income from Continuing Operations in the Company's Condensed Consolidated Statements of Operations. Prior to the Company's January 1, 2015 adoption of ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” this impairment charge would have been recorded in discontinued operations.
Discontinued Operations
Results from discontinued operations for the three months ended March 31, 2015 were income of $0.3 million compared to losses of $3.5 million for the three months ended March 31, 2014 . These amounts include the results of operations and impairments related to assets classified as held for sale or disposed of as of December 31, 2014 . See Note 2 to the Company's Condensed Consolidated Financial Statements accompanying this report for more detail, regarding the impact of the Company's January 1, 2015 adoption of ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.”

Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk in the form of changing interest rates on its debt and mortgage notes and other notes receivable. Management uses regular monitoring of market conditions and analysis techniques to manage this risk. During the three months ended March 31, 2015 , there were no material changes in the quantitative and qualitative disclosures about market risks presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 .

Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports it files or submits under the Exchange Act.

Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


22

PART II—OTHER INFORMATION

Item 1. Legal Proceedings
The Company is, from time to time, involved in litigation arising in the ordinary course of business or which is expected to be covered by insurance. 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 1A. Risk Factors
In addition to the other information set forth in this report, an investor should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 , which could materially affect the Company’s business, financial condition or future results. The risks, as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 , are not the only risks facing the Company. Additional risks and uncertainties not currently known to management or that management currently deems immaterial also may materially, adversely affect the Company’s business, financial condition, operating results or cash flows.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended March 31, 2015 , the Company withheld shares of Company common stock to satisfy employee tax withholding obligations payable upon the vesting of nonvested stock, 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
6,197

27.32

—

—

February 1 - February 28
1,085

29.65

—

—

March 1 - March 31
—

—

—

—

Total
7,282


Item 5. Other Information
The information in Note 7 to the Condensed Consolidated Financial Statements included in this Form 10-Q, under the heading “Subsequent Event” regarding the termination of the Company’s defined benefit pension plan is incorporated herein by reference.


23

Item 6. Exhibits
Exhibit
Description
Exhibit 3.1
Second Articles of Amendment and Restatement of the Company (1)
Exhibit 3.2
Amended and Restated Bylaws of the Company, as amended (2)
Exhibit 4.1
Specimen Stock Certificate (1)
Exhibit 4.2
Indenture, dated as of May 15, 2001, by and between the Company and Regions Bank, as trustee (3)
Exhibit 4.3
Third Supplemental Indenture, dated December 4, 2009, by and between the Company and Regions Bank, as Trustee (4)
Exhibit 4.4
Form of 6.50% Senior Notes due 2017 (set forth in Exhibit B to the Third Supplemental Indenture filed as Exhibit 4.3 thereto) (4)
Exhibit 4.5
Fourth Supplemental Indenture, dated December 13, 2010, by and between the Company and Regions Bank, as Trustee (5)
Exhibit 4.6
Form of 5.750% Senior Notes due 2021 (set forth in Exhibit B to the Fourth Supplemental Indenture filed as Exhibit 4.5 thereto) (5)
Exhibit 4.7
Fifth Supplemental Indenture, dated March 26, 2013, by and between the Company and Regions Bank, as Trustee (6)
Exhibit 4.8
Form of 3.75% Senior Notes due 2023 (set forth in Exhibit B to the Fifth Supplemental Indenture filed as Exhibit 4.7 thereto) (6)
Exhibit 4.9
Sixth Supplemental Indenture, dated April 24, 2015, by and between the Company and Regions Bank, as Trustee (7)
Exhibit 4.10
Form of 3.875% Senior Notes due 2025 (set forth in Exhibit B to the Sixth Supplemental Indenture filed as Exhibit 4.9 thereto) (7)
Exhibit 10.1
Second Amendment to Healthcare Realty Trust Incorporated Second Amended and Restated Executive Retirement Plan, dated as of May 5, 2015 (filed herewith)
Exhibit 11
Statement re: Computation of per share earnings (filed herewith in Note 5 to the Condensed Consolidated Financial Statements)
Exhibit 31.1
Certification of the Chief Executive Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
Exhibit 31.2
Certification of the Chief Financial Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
Exhibit 32
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
Exhibit 101.INS
XBRL Instance Document (filed herewith)
Exhibit 101.SCH
XBRL Taxonomy Extension Schema Document (filed herewith)
Exhibit 101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
Exhibit 101.LAB
XBRL Taxonomy Extension Labels Linkbase Document (filed herewith)
Exhibit 101.DEF
XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
Exhibit 101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
________________
(1) Filed as an exhibit to the Company’s Registration Statement on Form S-11 (Registration No. 33-60506) previously filed pursuant to the Securities Act of 1933 and hereby incorporated by reference.
(2) Filed as an exhibit to the Company’s Form 10-Q for the quarter ended September 30, 2007 and hereby incorporated by reference.
(3) Filed as an exhibit to the Company's Form 8-K filed May 17, 2001 and hereby incorporated as reference.
(4) Filed as an exhibit to the Company’s Form 8-K filed December 4, 2009 and hereby incorporated by reference.
(5) Filed as an exhibit to the Company’s Form 8-K filed December 13, 2010 and hereby incorporated by reference.
(6) Filed as an exhibit to the Company's Form 8-K filed March 26, 2013 and hereby incorporated by reference.
(7) Filed as an exhibit to the Company's Form 8-K filed April 24, 2015 and hereby incorporated by reference.

24


SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HEALTHCARE REALTY TRUST INCORPORATED
By:
/s/ SCOTT W. HOLMES
Scott W. Holmes
Executive Vice President and Chief Financial Officer
Date:
May 6, 2015



25

Exhibit Index
Exhibit
Description
Exhibit 3.1
Second Articles of Amendment and Restatement of the Company (1)
Exhibit 3.2
Amended and Restated Bylaws of the Company, as amended (2)
Exhibit 4.1
Specimen Stock Certificate (1)
Exhibit 4.2
Indenture, dated as of May 15, 2001, by and between the Company and Regions Bank, as trustee (3)
Exhibit 4.3
Third Supplemental Indenture, dated December 4, 2009, by and between the Company and Regions Bank, as Trustee (4)
Exhibit 4.4
Form of 6.50% Senior Notes due 2017 (set forth in Exhibit B to the Third Supplemental Indenture filed as Exhibit 4.3 thereto) (4)
Exhibit 4.5
Fourth Supplemental Indenture, dated December 13, 2010, by and between the Company and Regions Bank, as Trustee (5)
Exhibit 4.6
Form of 5.750% Senior Notes due 2021 (set forth in Exhibit B to the Fourth Supplemental Indenture filed as Exhibit 4.5 thereto) (5)
Exhibit 4.7
Fifth Supplemental Indenture, dated March 26, 2013, by and between the Company and Regions Bank, as Trustee (6)
Exhibit 4.8
Form of 3.75% Senior Notes due 2023 (set forth in Exhibit B to the Fifth Supplemental Indenture filed as Exhibit 4.7 thereto) (6)
Exhibit 4.9
Sixth Supplemental Indenture, dated April 24, 2015, by and between the Company and Regions Bank, as Trustee (7)
Exhibit 4.10
Form of 3.875% Senior Notes due 2025 (set forth in Exhibit B to the Sixth Supplemental Indenture filed as Exhibit 4.9 thereto) (7)
Exhibit 10.1
Second Amendment to Healthcare Realty Trust Incorporated Second Amended and Restated Executive Retirement Plan, dated as of May 5, 2015 (filed herewith)
Exhibit 11
Statement re: Computation of per share earnings (filed herewith in Note 5 to the Condensed Consolidated Financial Statements)
Exhibit 31.1
Certification of the Chief Executive Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
Exhibit 31.2
Certification of the Chief Financial Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
Exhibit 32
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
Exhibit 101.INS
XBRL Instance Document (filed herewith)
Exhibit 101.SCH
XBRL Taxonomy Extension Schema Document (filed herewith)
Exhibit 101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
Exhibit 101.LAB
XBRL Taxonomy Extension Labels Linkbase Document (filed herewith)
Exhibit 101.DEF
XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
Exhibit 101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
________________
(1) Filed as an exhibit to the Company’s Registration Statement on Form S-11 (Registration No. 33-60506) previously filed pursuant to the Securities Act of 1933 and hereby incorporated by reference.
(2) Filed as an exhibit to the Company’s Form 10-Q for the quarter ended September 30, 2007 and hereby incorporated by reference.
(3) Filed as an exhibit to the Company's Form 8-K filed May 17, 2001 and hereby incorporated as reference.
(4) Filed as an exhibit to the Company’s Form 8-K filed December 4, 2009 and hereby incorporated by reference.
(5) Filed as an exhibit to the Company’s Form 8-K filed December 13, 2010 and hereby incorporated by reference.
(6) Filed as an exhibit to the Company's Form 8-K filed March 26, 2013 and hereby incorporated by reference.
(7) Filed as an exhibit to the Company's Form 8-K filed April 24, 2015 and hereby incorporated by reference.

26
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