Healthcare Realty Trust Inc 10-Q for FY2024 Q1
Healthcare Realty Trust Inc (HR)
10-Q
2024-05-07
For: 2024-03-31
View Original
Added on
April 07, 2026
About this 10-Q
Healthcare Realty Trust Inc filed this 10-Q on May 7, 2024, covering the quarter ended March 31, 2024 (FY2024 Q1).
Headline figures
Quarter ended March 31, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $326.81M
- down 1.8% from $332.93M a year earlier
- Net loss
- $310.84M
- compared with a net loss of $87.13M a year earlier
- Diluted EPS
- -$0.82
- compared with -$0.23 a year earlier
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
(Mark One) | ||||||||
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
| For the quarterly period ended: | ||||||||
OR | ||||||||
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to | ||||||||
Commission File Number: 001-35568 (Healthcare Realty Trust Incorporated)
(Exact name of Registrant as specified in its charter)
| (State or other jurisdiction of Incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices)
(615 ) 269-8175
(Registrant's telephone number, including area code)
www.healthcarerealty.com | ||
| (Internet address) | ||
Securities Registered Pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||||||||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 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.
| ☒ | ☐ | No | ||||||||||||
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
| ☒ | ☐ | No | ||||||||||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | ☐ | Accelerated filer | ☐ | Non-accelerated filer | ||||||||||||||||
| Smaller reporting company | Emerging growth company | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| Yes | ☒ | No | ||||||||||||
As of May 3, 2024, the Registrant had 378,544,088 shares of Common Stock outstanding.
HEALTHCARE REALTY TRUST INCORPORATED
FORM 10-Q
March 31, 2024
Table of Contents
| PART I - FINANCIAL INFORMATION | ||||||||
| PART II - OTHER INFORMATION | ||||||||
| Item 5 | Other Information | |||||||
| SIGNATURE | ||||||||
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Healthcare Realty Trust Incorporated
Condensed Consolidated Balance Sheets
Amounts in thousands, except per share data
| ASSETS | ||||||||
Unaudited MARCH 31, 2024 | DECEMBER 31, 2023 | |||||||
| Real estate properties | ||||||||
| Land | $ | $ | ||||||
| Buildings and improvements | ||||||||
| Lease intangibles | ||||||||
| Personal property | ||||||||
| Investment in financing receivable, net | ||||||||
| Financing lease right-of-use assets | ||||||||
| Construction in progress | ||||||||
| Land held for development | ||||||||
| Total real estate properties | ||||||||
| Less accumulated depreciation and amortization | ( | ( | ||||||
| Total real estate properties, net | ||||||||
| Cash and cash equivalents | ||||||||
| Assets held for sale, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Investments in unconsolidated joint ventures | ||||||||
| Goodwill | ||||||||
| Other assets, net | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Liabilities | ||||||||
| Notes and bonds payable | $ | $ | ||||||
| Accounts payable and accrued liabilities | ||||||||
| Liabilities of assets held for sale | ||||||||
| Operating lease liabilities | ||||||||
| Financing lease liabilities | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Redeemable non-controlling interests | ||||||||
| Stockholders' equity | ||||||||
Preferred stock, $ | ||||||||
Class A Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive income (loss) | ( | |||||||
| Cumulative net income attributable to common stockholders | ||||||||
| Cumulative dividends | ( | ( | ||||||
| Total stockholders' equity | ||||||||
| Non-controlling interest | ||||||||
| Total equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
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, 2023, 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, 2024 and 2023
Amounts in thousands, except per share data
Unaudited
| THREE MONTHS ENDED March 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Revenues | ||||||||||||||
| Rental income | $ | $ | ||||||||||||
| Interest income | ||||||||||||||
| Expenses | ||||||||||||||
| Property operating | ||||||||||||||
| General and administrative | ||||||||||||||
| Transaction costs | ||||||||||||||
| Merger-related costs | ||||||||||||||
| Depreciation and amortization | ||||||||||||||
| Other income (expense) | ||||||||||||||
| Gain on sales of real estate properties | ||||||||||||||
| Interest expense | ( | ( | ||||||||||||
| Impairment of real estate properties and credit loss reserves | ( | ( | ||||||||||||
| Impairment of goodwill | ( | |||||||||||||
| Equity loss from unconsolidated joint ventures | ( | ( | ||||||||||||
| Interest and other income, net | ||||||||||||||
| ( | ( | |||||||||||||
| Net loss | $ | ( | $ | ( | ||||||||||
| Net loss attributable to non-controlling interests | ||||||||||||||
| Net loss attributable to common stockholders | $ | ( | $ | ( | ||||||||||
| Basic earnings per common share | $ | ( | $ | ( | ||||||||||
| Diluted earnings per common share | $ | ( | $ | ( | ||||||||||
| Weighted average common shares outstanding - basic | ||||||||||||||
| Weighted average common shares outstanding - diluted | ||||||||||||||
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, 2023, are an integral part of these financial statements.
2
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Comprehensive Loss
For the Three Months Ended March 31, 2024 and 2023
Amounts in thousands
Unaudited
| THREE MONTHS ENDED March 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Net loss | $ | ( | $ | ( | ||||||||||
| Other comprehensive income | ||||||||||||||
| Interest rate derivatives | ||||||||||||||
| Reclassification adjustments for gains included in interest expense | ( | ( | ||||||||||||
| Gains (losses) arising during the period on interest rate swaps | ( | |||||||||||||
| ( | ||||||||||||||
| Comprehensive loss | ( | ( | ||||||||||||
| Less: comprehensive loss attributable to non-controlling interests | ||||||||||||||
| Comprehensive loss attributable to common stockholders | $ | ( | $ | ( | ||||||||||
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, 2023, are an integral part of these financial statements.
3
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Equity and Redeemable Non-Controlling Interests
For the Three Months Ended March 31, 2024 and 2023
Amounts in thousands, except per share data
Unaudited
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Cumulative Net Income | Cumulative Dividends | Total Stockholders’ Equity | Non-controlling Interests | Total Equity | Redeemable Non-controlling Interests | |||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | ( | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||
| Issuance of common stock, net of issuance costs | — | — | — | — | — | — | |||||||||||||||||||||||
| Common stock redemptions | — | ( | — | — | — | ( | — | ( | — | ||||||||||||||||||||
| Conversion of OP Units to common stock | — | — | — | ( | — | ||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | ||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | ( | ( | — | ||||||||||||||||||||
| Reclassification adjustments for gains included in net income (interest expense) | — | — | ( | — | — | ( | ( | ( | — | ||||||||||||||||||||
| Gains arising during the period on interest rate swaps | — | — | — | — | — | ||||||||||||||||||||||||
| Contributions from redeemable non-controlling interests | — | — | — | — | — | — | — | — | |||||||||||||||||||||
| Adjustments to redemption value of redeemable non-controlling interests | — | — | — | — | — | — | — | — | ( | ||||||||||||||||||||
Dividends to common stockholders and distributions to non-controlling interest holders ($ | — | — | — | — | ( | ( | ( | ( | — | ||||||||||||||||||||
| Balance at March 31, 2024 | $ | $ | $ | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Cumulative Net Income | Cumulative Dividends | Total Stockholders’ Equity | Non-controlling Interests | Total Equity | Redeemable Non-controlling Interests | |||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||
| Issuance of common stock, net of issuance costs | — | — | — | — | — | — | |||||||||||||||||||||||
| Common stock redemptions | ( | ( | — | — | — | ( | — | ( | — | ||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | ||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | ( | ( | — | ||||||||||||||||||||
| Reclassification adjustments for gains included in net income (interest expense) | — | — | ( | — | — | ( | ( | ( | — | ||||||||||||||||||||
| Losses arising during the period on interest rate swaps | — | — | ( | — | — | ( | ( | ( | — | ||||||||||||||||||||
| Adjustments to redemption value of redeemable non-controlling interests | — | — | — | — | — | — | — | — | ( | ||||||||||||||||||||
Dividends to common stockholders and distributions to non-controlling interest holders ($ | — | — | — | — | ( | ( | ( | ( | — | ||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | ( | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||
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, 2023, are an integral part of these financial statements.
4
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2024 and 2023
Amounts in thousands
Unaudited
| OPERATING ACTIVITIES | ||||||||
| THREE MONTHS ENDED March 31, | ||||||||
| 2024 | 2023 | |||||||
| Net loss | $ | ( | $ | ( | ||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Other amortization | ||||||||
| Share-based compensation | ||||||||
| Amortization of straight-line rent receivable (lessor) | ( | ( | ||||||
| Amortization of straight-line rent on operating leases (lessee) | ||||||||
| Gain on sales of real estate properties | ( | ( | ||||||
| Impairment of real estate properties and credit loss reserves | ||||||||
| Impairment of goodwill | ||||||||
| Equity loss from unconsolidated joint ventures | ||||||||
| Distributions from unconsolidated joint ventures | ||||||||
| Non-cash interest from financing and notes receivable | ( | ( | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Other assets, including right-of-use-assets | ( | ( | ||||||
| Accounts payable and accrued liabilities | ( | ( | ||||||
| Other liabilities | ||||||||
| Net cash provided by operating activities | ||||||||
| INVESTING ACTIVITIES | ||||||||
| Acquisitions of real estate | ( | |||||||
| Development of real estate | ( | ( | ||||||
| Additional long-lived assets | ( | ( | ||||||
| Funding of mortgages and notes receivable | ( | ( | ||||||
| Investments in unconsolidated joint ventures | ( | |||||||
| Investment in financing receivable | ( | |||||||
| Contributions from redeemable non-controlling interests | ||||||||
| Proceeds from sales of real estate properties and additional long-lived assets | ||||||||
| Proceeds from notes receivable repayments | ||||||||
| Net cash (used in) provided by investing activities | ( | |||||||
| FINANCING ACTIVITIES | ||||||||
| Net borrowings on unsecured credit facility | — | |||||||
| Repayments of notes and bonds payable | ( | ( | ||||||
| Dividends paid | ( | ( | ||||||
| Net proceeds from issuance of common stock | ||||||||
| Common stock redemptions | ( | ( | ||||||
| Distributions to non-controlling interest holders | ( | ( | ||||||
| Payments made on finance leases | ( | ( | ||||||
| Net cash used in financing activities | ( | ( | ||||||
| Increase (decrease) in cash and cash equivalents | ( | |||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental Cash Flow Information | ||||||||
| Interest paid | $ | $ | ||||||
| Mortgage note receivables taken in connection with sale of real estate | $ | $ | ||||||
| Invoices accrued for construction, tenant improvements and other capitalized costs | $ | $ | ||||||
| Capitalized interest | $ | $ | ||||||
5
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Business Overview
Healthcare Realty Trust Incorporated ("Company") is a real estate investment trust ("REIT") that owns, leases, manages, acquires, finances, develops and redevelops income-producing real estate properties associated primarily with the delivery of outpatient healthcare services throughout the United States. As of March 31, 2024, the Company had gross investments of approximately $13.4 billion in 654 consolidated real estate properties, construction in progress, redevelopments, financing receivables, financing lease right-of-use assets, land held for development and corporate property, excluding held for sale assets. The Company's real estate properties are located in 35 states and total approximately 38.4 million square feet. The Company provided leasing and property management services to 92 % of its portfolio nationwide as of March 31, 2024.
On July 20, 2022, pursuant to that certain Agreement and Plan of Merger dated as of February 28, 2022, by and among Healthcare Realty Trust Incorporated, a Maryland corporation (now known as HRTI, LLC, a Maryland limited liability company) (“Legacy HR”), Healthcare Trust of America, Inc., a Maryland corporation (now known as Healthcare Realty Trust Incorporated) (“Legacy HTA”), Healthcare Trust of America Holdings, LP, a Delaware limited partnership (now known as Healthcare Realty Holdings, L.P.) (the “OP”), and HR Acquisition 2, LLC, a Maryland limited liability company (“Merger Sub”), Merger Sub merged with and into Legacy HR, with Legacy HR continuing as the surviving entity and a wholly-owned subsidiary of Legacy HTA (the “Merger”). The combined company operates under the name “Healthcare Realty Trust Incorporated” and its shares of class A common stock, $0.01 par value per share, trade on the New York Stock Exchange under the ticker symbol “HR”.
The Company is structured as an umbrella partnership REIT under which substantially all of its business is conducted through the OP, the day-to-day management of which is exclusively controlled by the Company. As of March 31, 2024, the Company owned 98.6 % of the issued and outstanding units of the OP, with other investors owning the remaining 1.4 % of outstanding units.
In addition, as of March 31, 2024, the Company had a weighted average ownership interest of approximately 43 % in 33 real estate properties held in unconsolidated joint ventures. See Note 2 below for more details regarding the Company's unconsolidated joint ventures.
Basis of Presentation
The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States ("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. All material intercompany transactions and balances have been eliminated in consolidation.
This interim financial information should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. 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, 2024 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.
Principles of Consolidation
The Company’s Condensed Consolidated Financial Statements include the accounts of the Company, its wholly owned subsidiaries, and joint ventures and partnerships where the Company controls the operating activities. GAAP requires us to identify entities for which control is achieved through means other than voting rights and to determine which business enterprise is the primary beneficiary of variable interest entities (“VIEs”). Accounting Standards Codification (“ASC”) Topic 810, Consolidation broadly defines a VIE as an entity in which either (i) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of such entity that most significantly impact such entity’s economic performance or (ii) the equity investment at risk is insufficient to
6
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
finance that entity’s activities without additional subordinated financial support. The Company identifies the primary beneficiary of a VIE as the enterprise that has both of the following characteristics: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses or receive benefits of the VIE that could potentially be significant to the entity. The Company consolidates its investment in a VIE when it determines that it is the VIE’s primary beneficiary, with any minority interests reflected as non-controlling interests or redeemable non-controlling interests in the accompanying Condensed Consolidated Financial Statements.
The Company may change its original assessment of a VIE upon subsequent events, such as the modification of contractual arrangements that affect the characteristics or adequacy of the entity’s equity investments at risk, the disposition of all or a portion of an interest held by the primary beneficiary, or changes in facts and circumstances that impact the power to direct activities of the VIE that most significantly impacts economic performance. The Company performs this analysis on an ongoing basis.
For property holding entities not determined to be VIEs, the Company consolidates such entities in which it owns 100 % of the equity or has a controlling financial interest evidenced by ownership of a majority voting interest. All intercompany balances and transactions are eliminated in consolidation. For entities in which the Company owns less than 100 % of the equity interest, the Company consolidates the entity if it has the direct or indirect ability to control the entities’ activities based upon the terms of the respective entities’ ownership agreements.
As of March 31, 2024, the Company had four consolidated VIEs, in addition to the OP, consisting of joint venture investments in which the Company is the primary beneficiary of the VIE based on the combination of operational control and the rights to receive residual returns or the obligation to absorb losses arising from the joint ventures. Accordingly, such joint ventures have been consolidated, and the table below summarizes the balance sheets of consolidated VIEs, excluding the OP, in the aggregate:
| (dollars in thousands) | MARCH 31, 2024 | ||||
| Assets: | |||||
| Net real estate investments | $ | ||||
| Cash and cash equivalents | |||||
Receivables and other assets | |||||
Total assets | $ | ||||
Liabilities: | |||||
Accrued expenses and other liabilities | $ | ||||
Total equity | |||||
Total liabilities and equity | $ | ||||
As of March 31, 2024, the Company had three unconsolidated VIEs consisting of two notes receivables and one joint venture. The Company does not have the power or economic interests to direct the activities of the VIEs on a stand-alone basis, and therefore it was determined that the Company was not the primary beneficiary. As a result, the Company accounts for the two notes receivables as amortized cost and a joint venture arrangement under the equity method. See below for additional information regarding the Company's unconsolidated VIEs.
7
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
| (dollars in thousands) ORIGINATION DATE | LOCATION | SOURCE | CARRYING AMOUNT | MAXIMUM EXPOSURE TO LOSS | ||||||||||
| 2021 | Houston, TX 1 | Note receivable | $ | $ | ||||||||||
| 2021 | Charlotte, NC 1 | Note receivable | ||||||||||||
| 2022 | Texas 2 | Joint venture | ||||||||||||
1Assumed mortgage note receivable in connection with the Merger.
2Includes investments in seven properties.
Use of Estimates in the Condensed Consolidated Financial Statements
Redeemable Non-Controlling Interests
Asset Impairment
As of March 31, 2024, three properties totaling $2.9 million were measured at fair value using level 3 fair value hierarchy. The level 3 fair value techniques included brokerage estimates and unexecuted purchase and sale agreements, less estimated closing costs.
Goodwill Impairment
Investments in Leases - Financing Receivables, Net
8
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
| (dollars in thousands) ORIGINATION DATE | LOCATION | INTEREST RATE | CARRYING VALUE as of MARCH 31, 2024 | ||||||||
| May 2021 | Poway, CA | $ | |||||||||
| November 2021 | Columbus, OH | ||||||||||
| $ | |||||||||||
Real Estate Notes Receivable
| (dollars in thousands) | ORIGINATION | MATURITY | STATED INTEREST RATE | MAXIMUM LOAN COMMITMENT | OUTSTANDING as of MAR 31, 2024 | ALLOWANCE FOR CREDIT LOSSES | FAIR VALUE DISCOUNT AND FEES | CARRYING VALUE as of MAR 31, 2024 | ||||||||||||||||||
| Mezzanine loans | ||||||||||||||||||||||||||
| Texas | 6/24/2021 | 6/24/2024 | % | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||
| Arizona | 12/21/2023 | 12/20/2026 | % | |||||||||||||||||||||||
| ( | ( | |||||||||||||||||||||||||
| Mortgage loans | ||||||||||||||||||||||||||
| Texas | 6/30/2021 | 7/01/2024 | % | |||||||||||||||||||||||
| North Carolina | 12/22/2021 | 12/22/2024 | % | ( | ||||||||||||||||||||||
| Florida | 5/17/2022 | 2/27/2026 | % | ( | ||||||||||||||||||||||
| California | 3/30/2023 | 3/29/2026 | % | |||||||||||||||||||||||
| Florida | 12/28/2023 | 12/28/2026 | % | |||||||||||||||||||||||
| ( | ||||||||||||||||||||||||||
| $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||
Allowance for Credit Losses
Pursuant to ASC Topic 326, Financial Instruments - Credit Losses, the Company adopted a policy to evaluate current expected credit losses at the inception of loans qualifying for treatment under ASC Topic 326. The Company utilizes a probability of default method approach for estimating current expected credit losses and evaluates the liquidity and creditworthiness of its borrowers on a quarterly basis to determine whether any updates to the future expected losses recognized upon inception are necessary. The Company’s evaluation considers industry and economic conditions, credit enhancements, liquidity, and other factors. The determination of the credit allowance is based on a quarterly evaluation of all outstanding loans, including general economic conditions and estimated collectability of loan payments. The Company evaluates the collectability of loan receivables based on a combination of credit quality indicators, including, but not limited to, payment status, historical loan charge-offs, financial strength of the borrower and guarantors, and nature, extent, and value of the underlying collateral. A loan is considered to have deteriorated credit quality when, based on current information and events, it is probable that the Company will be unable to collect all amounts due as scheduled according to the contractual terms of the loan agreement. For those loans identified as having deteriorated credit quality, the amount of credit loss is determined on an individual basis. Placement on non-accrual status may be required. Consistent with this definition, all loans on non-accrual status are deemed to have deteriorated credit quality. To the extent circumstances improve and the risk of collectability is diminished, the loan may return to income accrual status. While a loan is on non-accrual status, any cash receipts are applied against the outstanding principal balance.
During the first quarter of 2023, the Company determined that the risk of credit loss on a few of its mezzanine loans were no longer remote and recorded a credit loss reserve of $5.2 million. During the three months ended March 31, 2024, the Company determined that no additional credit loss reserve was needed for its real estate notes receivable.
9
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
The following table summarizes the Company's allowance for credit losses on real estate notes receivable:
| Dollars in thousands | THREE MONTHS ENDED MARCH 31, 2024 | TWELVE MONTHS ENDED DECEMBER 31, 2023 | |||||||||||||||
| Allowance for credit losses, beginning of period | $ | $ | |||||||||||||||
| Credit loss reserves | |||||||||||||||||
| Allowance for credit losses, end of period | $ | $ | |||||||||||||||
Interest Income
Income from Lease Financing Receivables
The Company recognized the related income from two financing receivables totaling $2.1 million for each of the three months ended March 31, 2024 and 2023, based on an imputed interest rate over the terms of the applicable lease. As a result, the interest recognized from the financing receivable in any particular period will not equal the cash payments from the lease agreement in that period.
Acquisition costs incurred in connection with entering into the financing receivable are treated as loan origination fees. These costs are classified with the financing receivable and are included in the balance of the net investment. Amortization of these amounts will be recognized as a reduction to Interest income over the life of the lease.
Income from Real Estate Notes Receivable
During the three months ended March 31, 2024 and 2023, the Company recognized interest income of $2.4 million and $2.1 million, respectively, related to real estate notes receivable. The Company recognizes interest income on an accrual basis unless the Company has determined that collectability of contractual amounts is not reasonably assured, at which point the note is placed on non-accrual status and interest income is recognized on a cash basis. In 2023, the Company placed two of its real estate notes receivable with principal balances, net of credit loss, of $48.9 million on non-accrual status and accordingly did not recognize any interest income for the three months ended March 31, 2024.
Revenue from Contracts with Customers (ASC Topic 606)
The Company recognizes certain revenue under the core principle of ASC Topic 606. This topic requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Lease revenue is not within the scope of ASC Topic 606. To achieve the core principle, the Company applies the five-step model specified in the guidance.
| THREE MONTHS ENDED March 31, | ||||||||||||||
| in thousands | 2024 | 2023 | ||||||||||||
| Type of Revenue | ||||||||||||||
| Parking income | $ | $ | ||||||||||||
Management fee income/other 1 | ||||||||||||||
| $ | $ | |||||||||||||
The Company’s major types of revenue that are accounted for under Topic 606 that are listed above are all accounted for as the performance obligation is satisfied. The performance obligations that are identified for each of these items are satisfied over time, and the Company recognizes revenue monthly based on this principle.
New Accounting Pronouncements
On November 27, 2023, the Financial Accounting Standards Board ("FASB") issued ASU 2023-07, Segment Reporting (Topic 280). Some of the main provisions of this update to segment reporting include; (i) a requirement to disclose significant segment expenses, on an annual and interim basis, that are regularly provided to the chief operating decision maker ("CODM") and included within each reported measure of segment profit or loss; (ii) a requirement to
10
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
disclose the title and position of the CODM and an explanation of how the CODM uses the reported measures of segment profit or loss in assessing segment performance and deciding how to allocate resources, and (iii) a requirement that an entity that has a single reportable segment provide all the disclosures required by the amendments in this update.
Note 2. Real Estate Investments
2024 Acquisition Activity
The Company had no real estate acquisition activity for the three months ended March 31, 2024.
Unconsolidated Joint Ventures
The Company's investment in and loss recognized for the three months ended March 31, 2024 and 2023 related to its unconsolidated joint ventures accounted for under the equity method are shown in the table below:
| THREE MONTHS ENDED March 31, | ||||||||||||||
| Dollars in thousands | 2024 | 2023 | ||||||||||||
| Investments in unconsolidated joint ventures, beginning of period | $ | $ | ||||||||||||
New investment during the period 1 | ||||||||||||||
| Equity loss recognized during the period | ( | ( | ||||||||||||
| Owner distributions | ( | ( | ||||||||||||
| Investments in unconsolidated joint ventures, end of period | $ | $ | ||||||||||||
2024 Real Estate Asset Dispositions
The Company had no real estate dispositions for the three months ended March 31, 2024.
Subsequent to March 31, 2024, the Company disposed of two medical outpatient buildings totaling 39,000 square feet for an aggregate of $5.8 million. The two properties were classified as held for sale as of March 31, 2024.
11
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Assets Held for Sale
The table below reflects the assets and liabilities classified as held for sale as of March 31, 2024 and December 31, 2023:
| Dollars in thousands | March 31, 2024 | December 31, 2023 | ||||||||||||
| Balance Sheet data: | ||||||||||||||
| Land | $ | $ | ||||||||||||
| Building and improvements | ||||||||||||||
| Lease intangibles | ||||||||||||||
| Accumulated depreciation | ( | ( | ||||||||||||
Real estate assets held for sale, net 1 | ||||||||||||||
| Cash and cash equivalents | ||||||||||||||
| Operating lease right-of-use assets | ||||||||||||||
| Other assets, net | ||||||||||||||
| Assets held for sale, net | $ | $ | ||||||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||||||||
| Operating lease liabilities | ||||||||||||||
| Other liabilities | ||||||||||||||
| Liabilities of assets held for sale | $ | $ | ||||||||||||
1 Net real estate assets held for sale includes the impact of $1.5 million of impairment charges for the three months ended March 31, 2024.
Note 3. Leases
Lessor Accounting
The Company’s properties generally are leased pursuant to non-cancelable, fixed-term operating leases with expiration dates through 2052. Some leases provide tenants with fixed rent renewal terms while others have market rent renewal terms. Some leases provide the lessee, during the term of the lease, with an option or right of first refusal to purchase the leased property. The Company’s single-tenant net leases generally require the lessee to pay minimum rent and all taxes (including property tax), insurance, maintenance and other operating costs associated with the leased property.
The Company's leases typically have escalators that are either based on a stated percentage or an index such as the consumer price index ("CPI"). In addition, most of the Company's leases include nonlease components, such as reimbursement of operating expenses as additional rent, or include the reimbursement of expected operating expenses as part of the lease payment. The Company adopted an accounting policy to combine lease and nonlease components. Rent escalators based on indices and reimbursements of operating expenses that are not included in the lease rate are considered variable lease payments. Variable payments are recognized in the period earned. Lease income for the Company's operating leases recognized for the three months ended March 31, 2024 was $318.1 million. Lease income for the Company's operating leases recognized for the three months ended March 31, 2023 was $324.1 million.
Future lease payments under the non-cancelable operating leases, excluding any reimbursements and one sale-type lease, as of March 31, 2024 were as follows:
| Dollars in thousands | OPERATING | |||||||
| 2024 | $ | |||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| 2029 and thereafter | ||||||||
| $ | ||||||||
12
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Lessee Accounting
As of March 31, 2024, the Company was obligated, as the lessee, under operating lease agreements consisting primarily of the Company’s ground leases. As of March 31, 2024, the Company had 231 properties totaling 16.9 million square feet that were held under ground leases. Some of the ground lease renewal terms are based on fixed rent renewal terms and others have market rent renewal terms. These ground leases typically have initial terms of 40 to 99 years with expiration dates through 2119. Any rental increases related to the Company’s ground leases are generally either stated or based on CPI. The Company had 75 prepaid ground leases as of March 31, 2024. The amortization of the prepaid rent, included in the operating lease right-of-use asset, represented approximately $0.3
The Company’s future lease payments (primarily for its 156 non-prepaid ground leases) as of March 31, 2024 were as follows:
| Dollars in thousands | OPERATING | FINANCING | ||||||
| 2024 | $ | $ | ||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| 2029 and thereafter | ||||||||
| Total undiscounted lease payments | ||||||||
| Discount | ( | ( | ||||||
| Lease liabilities | $ | $ | ||||||
The following table provides details of the Company's total lease expense for the three months ended March 31, 2024 and 2023:
| THREE MONTHS ENDED March 31, | ||||||||||||||
| Dollars in thousands | 2024 | 2023 | ||||||||||||
| Operating lease cost | ||||||||||||||
| Operating lease expense | $ | $ | ||||||||||||
| Variable lease expense | ||||||||||||||
| Finance lease cost | ||||||||||||||
| Amortization of right-of-use assets | ||||||||||||||
| Interest on lease liabilities | ||||||||||||||
| Total lease expense | $ | $ | ||||||||||||
| Other information | ||||||||||||||
| Operating cash flows outflows related to operating leases | $ | $ | ||||||||||||
| Operating cash flows outflows related to financing leases | $ | $ | ||||||||||||
| Financing cash flows outflows related to financing leases | $ | $ | ||||||||||||
| Weighted-average years remaining lease term (excluding renewal options) - operating leases | ||||||||||||||
| Weighted-average years remaining lease term (excluding renewal options) - finance leases | ||||||||||||||
| Weighted-average discount rate - operating leases | % | % | ||||||||||||
| Weighted-average discount rate - finance leases | % | % | ||||||||||||
13
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Note 4. Notes and Bonds Payable
The table below details the Company’s notes and bonds payable as of March 31, 2024 and December 31, 2023.
| MATURITY DATES | BALANCE 1 AS OF | EFFECTIVE INTEREST RATE as of 3/31/2024 | ||||||||||||
| Dollars in thousands | 3/31/2024 | 12/31/2023 | ||||||||||||
$ | 10/25 | $ | $ | % | ||||||||||
$ | 5/24 | % | ||||||||||||
$ | 7/24 | % | ||||||||||||
$ | 10/25 | % | ||||||||||||
$ | 6/26 | % | ||||||||||||
$ | 7/27 | % | ||||||||||||
$ | 1/28 | % | ||||||||||||
| Senior Notes due 2025 | 5/25 | % | ||||||||||||
Senior Notes due 2026 | 8/26 | % | ||||||||||||
| Senior Notes due 2027 | 7/27 | % | ||||||||||||
| Senior Notes due 2028 | 1/28 | % | ||||||||||||
| Senior Notes due 2030 | 2/30 | % | ||||||||||||
| Senior Notes due 2030 | 3/30 | % | ||||||||||||
| Senior Notes due 2031 | 3/31 | % | ||||||||||||
| Senior Notes due 2031 | 3/31 | % | ||||||||||||
Mortgage notes payable | 9/24-12/26 | |||||||||||||
| $ | $ | |||||||||||||
1Balance is presented net of discounts and issuance costs and inclusive of premiums, where applicable.
Changes in Mortgage Notes Payable
On January 6, 2024, the Company repaid in full at maturity a mortgage note payable bearing interest at a rate of 4.77 % per annum with an outstanding principal balance of $11.3 million. The mortgage note encumbered a 63,012 square foot property in California.
On February 1, 2024, the Company repaid in full at maturity a mortgage note payable bearing interest at a rate of 4.12 % per annum with an outstanding principal balance of $5.6 million. The mortgage note encumbered a 40,324 square foot property in Georgia.
Note 5. Derivative Financial Instruments
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the
14
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
life of the agreements without exchange of the underlying notional amount. Such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.
For derivatives designated, and that qualify, as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income (Loss) ("AOCI") and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.
As of March 31, 2024, the Company had 15 outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
| AMOUNT | WEIGHTED AVERAGE RATE | |||||||
| May 2026 | % | |||||||
| June 2026 | % | |||||||
| December 2026 | % | |||||||
| June 2027 | % | |||||||
| December 2027 | % | |||||||
| $ | % | |||||||
Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet
The table below presents the fair value of the Company's derivative financial instruments, as well as their classification on the Condensed Consolidated Balance Sheet as of March 31, 2024.
| BALANCE AT MARCH 31, 2024 | ||||||||
| In thousands | BALANCE SHEET LOCATION | FAIR VALUE | ||||||
| Derivatives designated as hedging instruments | ||||||||
| Interest rate swaps | Other liabilities | $ | ( | |||||
| Interest rate swaps | Other assets | $ | ||||||
| Total derivatives designated as hedging instruments | $ | |||||||
Tabular Disclosure of the Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income (Loss)
The table below presents the effect of cash flow hedge accounting on AOCI during the three months ended March 31, 2024 and 2023 related to the Company's outstanding interest rate swaps.
| (GAIN)/LOSS RECOGNIZED IN AOCI ON DERIVATIVE three months ended March 31, | (GAIN)/LOSS RECLASSIFIED FROM AOCI INTO INCOME three months ended March 31, | ||||||||||||||||
| In thousands | 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Interest rate swaps | $ | ( | $ | Interest expense | $ | ( | $ | ( | |||||||||
| Settled treasury hedges | Interest expense | ||||||||||||||||
| Settled interest rate swaps | Interest expense | ||||||||||||||||
| $ | ( | $ | Total interest expense | $ | ( | $ | ( | ||||||||||
The Company estimates that an additional $10.5 million related to active interest rate swaps will be reclassified from AOCI as a decrease to interest expense over the next 12 months, and that an additional $0.6 million related to settled interest rate swaps will be amortized from AOCI as an increase to interest expense over the next 12 months.
Credit-risk-related Contingent Features
The Company's agreements with each of its derivative counterparties contain a cross-default provision under which the Company could be declared in default of its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on the indebtedness.
As of March 31, 2024, the fair value of derivatives in a net asset position including accrued interest but excluding any adjustment for nonperformance risk related to these agreements was $7.6 million. As of March 31, 2024, the Company had not posted any collateral related to these agreements and was not in breach of any agreement.
15
Note 6. Commitments and Contingencies
Legal Proceedings
The Company is, from time to time, involved in litigation arising in the ordinary course of business. 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.
Development and Redevelopment Activity
For the three months ended March 31, 2024, the Company invested $7.7 million and $2.8 million toward active development and redevelopment of properties, respectively, and $11.1 million toward recently completed development and redevelopment projects.
Note 7. Stockholders' Equity
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, 2024 and the twelve months ended December 31, 2023:
| THREE MONTHS ENDED MARCH 31, 2024 | TWELVE MONTHS ENDED DECEMBER 31, 2023 | |||||||
| Balance, beginning of period | ||||||||
| Issuance of common stock | ||||||||
| Conversion of OP unit to Common stock | ||||||||
| Non-vested share-based awards, net of withheld shares and forfeitures | ||||||||
| Balance, end of period | ||||||||
Common Stock Dividends
During the three months ended March 31, 2024, the Company declared and paid common stock dividends totaling $0.31 per share. On April 30, 2024, the Company declared a quarterly common stock dividend in the amount of $0.31 per share payable on May 23, 2024 to stockholders of record on May 13, 2024.
Authorization to Repurchase Common Stock
On May 31, 2023, the Company’s Board of Directors authorized the repurchase of up to $500.0 million of outstanding shares of the Company’s common stock either in the open market or through privately negotiated transactions, subject to market conditions, regulatory constraints, and other customary conditions. The Company is not obligated under this authorization to repurchase any specific number of shares. This authorization supersedes all previous stock repurchase authorizations. In April 2024, the Company repurchased 2,966,764 shares of its common stock at a weighted average price of $14.07 for a total of $41.7 million under this authorization.
On April 30, 2024, the Company's Board of directors authorized the repurchase of up to $500.0 million of outstanding shares of the Company's common stock, superseding the previous stock repurchase authorization.
16
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Earnings Per Common Share
The Company uses the two-class method of computing net earnings per common shares. The Company's non-vested share-based awards are considered participating securities pursuant to the two-class method.
The following table sets forth the computation of basic and diluted earnings per common share for the three months ended March 31, 2024 and 2023.
| THREE MONTHS ENDED MARCH 31, | ||||||||||||||
| Dollars in thousands, except per share data | 2024 | 2023 | ||||||||||||
| Weighted average common shares outstanding | ||||||||||||||
| Weighted average common shares outstanding | ||||||||||||||
| Non-vested shares | ( | ( | ||||||||||||
| Weighted average common shares outstanding - basic | ||||||||||||||
| Weighted average common shares outstanding - basic | ||||||||||||||
| Dilutive effect of forward equity shares | ||||||||||||||
| Dilutive effect of OP Units | ||||||||||||||
| Dilutive effect of employee stock purchase plan | — | |||||||||||||
| Weighted average common shares outstanding - diluted | ||||||||||||||
| Net loss | $ | ( | $ | ( | ||||||||||
| Income allocated to participating securities | ( | ( | ||||||||||||
| Loss attributable to non-controlling interest | ||||||||||||||
| Adjustment to loss attributable to non-controlling interest for legally outstanding restricted units | ( | ( | ||||||||||||
| Net loss applicable to common stockholders - basic | $ | ( | $ | ( | ||||||||||
| Basic earnings per common share - net loss | $ | ( | $ | ( | ||||||||||
| Diluted earnings per common share - net loss | $ | ( | $ | ( | ||||||||||
The effect of OP Units redeemable for 3,681,225 shares and options under the Company's Employee Stock Purchase Plan (the "ESPP") to purchase 23,140 shares of the Company's common stock for the three months ended March 31, 2024 were excluded from the calculation of diluted loss per common share because the effect was anti-dilutive due to the loss from continuing operations incurred during that period.
Stock Incentive Plan
The Company's stock incentive plan ("Incentive Plan") permits the grant of incentive awards to its employees and directors in any of the following forms: options, stock appreciation rights, restricted stock, restricted or deferred stock units, performance awards, dividend equivalents, or other stock-based awards, including units in the OP.
Equity Incentive Plans
During the three months ended March 31, 2024, the Company made the following equity awards:
•Restricted Stock
During the first quarter of 2024, the Company granted non-vested stock awards to its named executive officers and other members of senior management and employees with an aggregate grant date fair value of $5.6 million, which consisted of an aggregate of 361,712 non-vested shares with vesting periods ranging from to eight years .
•Restricted Stock Units ("RSUs")
On February 13, 2024, the Company granted an aggregate of 208,055 RSUs to members of senior management, with an aggregate grant date fair value of $3.5 million and a five-year vesting period.
Approximately 36 % of the RSUs vest based on relative total shareholder return ("TSR") and were valued using independent specialists. The Company utilized a Monte Carlo simulation to calculate the weighted
17
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
average grant date fair value of $19.10 for the relative TSR component for the February 2024 grant using the following assumptions:
| THREE MONTHS ENDED MARCH 31, | |||||||||||
| Volatility | % | ||||||||||
| Dividend assumption | Accrued | ||||||||||
| Expected term | |||||||||||
| Risk-free rate | % | ||||||||||
| Stock price (per share) | $ | ||||||||||
The remaining 64 % of the RSUs vest based upon certain operating performance conditions. With respect to the operating performance conditions of the February 13, 2024 grant, the grant date fair value was $15.22 based on the Company's share price on the date of grant.
•LTIP Series C Units
On February 13, 2024, the Company granted an aggregate of 906,044 LTIP Series C units ("LTIP-C units) in the OP with three-year forward-looking performance targets, a five-year vesting period and an aggregate grant date fair value of $7.5 million.
Approximately 36 % of the LTIP-C units vest based on relative TSR and were valued using independent specialists. The Company utilized a Monte Carlo simulation to calculate the weighted average grant date fair value of $9.62 for the relative TSR component for the February 2024 grant using the following assumptions:
| THREE MONTHS ENDED MARCH 31, | |||||||||||
| Volatility | % | ||||||||||
| Dividend assumption | Accrued | ||||||||||
| Expected term | |||||||||||
| Risk-free rate | % | ||||||||||
| Stock price (per share) | $ | ||||||||||
The remaining 64 % of the LTIP-C units vest based upon certain operating performance conditions. With respect to the operating performance conditions of the February 13, 2024 grant, the grant date fair value was $15.22 based on the Company's share price on the date of grant. The Company records amortization expense based on the probability of achieving certain operating performance conditions, which is evaluated throughout the performance period.
The following table represents the summary of non-vested share-based awards under the Incentive Plans for the three months ended March 31, 2024 and 2023:
| THREE MONTHS ENDED MARCH 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Share-based awards, beginning of period | ||||||||||||||
Granted 1 | ||||||||||||||
| Vested | ( | ( | ||||||||||||
| Forfeited | ( | ( | ||||||||||||
| Share-based awards, end of period | ||||||||||||||
1.LTIP-C units are issued at the maximum possible value of the award and are reflected as such in this table until the performance period has been satisfied and the exact number of awards are determinable.
During the three months ended March 31, 2024 and 2023, the Company withheld 8,228 and 38,632 shares of common stock, respectively, from participants to pay estimated withholding taxes related to shares that vested.
18
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
The following table represents expected amortization of the Company's non-vested shares issued as of March 31, 2024:
| Dollars in millions | FUTURE AMORTIZATION of non-vested shares | ||||
| 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 and thereafter | |||||
| Total | $ | ||||
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 (level 1 inputs) due to the short-term maturity of these investments.
•Real estate notes receivable - Real estate notes receivable are recorded in other assets on the Company's Condensed Consolidated Balance Sheets. Fair value is estimated using cash flow analyses, based on current interest rates for similar types of arrangements.
•Borrowings under the Unsecured Credit Facility and the Term Loans Due 2024 and 2026 - The carrying amount approximates fair value because the borrowings are based on variable market interest rates.
•Senior Notes and Mortgage 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.
•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, level 2 inputs, which consider forward yield curves and discount rates. See Note 5 for additional information.
The table below details the fair values and carrying values for notes and bonds payable and real estate notes receivable at March 31, 2024 and December 31, 2023.
| March 31, 2024 | December 31, 2023 | ||||||||||||||||
| Dollars in millions | CARRYING VALUE | FAIR VALUE | CARRYING VALUE | FAIR VALUE | |||||||||||||
Notes and bonds payable 1 | $ | $ | $ | $ | |||||||||||||
Real estate notes receivable 1 | $ | $ | $ | $ | |||||||||||||
1Level 2 – model-derived valuations in which significant inputs and significant value drivers are observable in active markets.
19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read together with the Consolidated Financial Statements and related Notes thereto included in Item 1 of this Quarterly Report on Form 10-Q. Other important factors are identified in our Annual Report on Form 10-K for the year ended December 31, 2023, including factors identified under the headings “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations."
Unless stated otherwise or the context otherwise requires, references to "Healthcare Realty Trust" are to Legacy HTA after giving effect to the Merger and references to the "Company," "we," "us," and "our" are to Healthcare Realty Trust and, unless the context requires otherwise, its consolidated subsidiaries, including the OP.
Disclosure Regarding Forward-Looking Statements
This report and other materials the Company has filed or may file with the SEC, 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," "budget" and other comparable terms. These forward-looking statements are based on the Company's current plans, objectives, estimates, expectations and intentions and inherently involve significant risks and uncertainties. Such risks and uncertainties include, among other things, the following: the Company’s expected results may not be achieved; failure to realize the expected benefits of the Merger; risks related to future opportunities and plans for the Company, including the uncertainty of expected future financial performance and results of the Company; the possibility that, if the Company does not achieve the perceived benefits of the Merger as rapidly or to the extent anticipated by financial analysts or investors, the market price of the Company’s common stock could decline; pandemics or other health crises, such as COVID-19; increases in interest rates; the availability and cost of capital at expected 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; the Company's ability to reposition or sell facilities with profitable results; the Company's ability to release space at similar rates as vacancies occur; the Company's ability to renew expiring leases; 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; the Company may be required under purchase options to sell properties and may not be able to reinvest the proceeds from such sales at rates of return equal to the return received on the properties sold; uninsured or underinsured losses related to casualty or liability; the incurrence of impairment charges on its real estate properties or other assets; other legal and operational matters; and other risks and uncertainties affecting the Company, including those described from time to time under the caption “Risk Factors” and elsewhere in the Company’s filings and reports with the SEC, including the Company's Annual Report on Form 10-K for the year ended December 31, 2023. Moreover, other risks and uncertainties of which the Company is not currently aware may also affect the Company's forward-looking statements and may cause actual results and the timing of events to differ materially from those anticipated. The forward-looking statements made in this communication are made only as of the date hereof or as of the dates indicated in the forward-looking statements, even if they are subsequently made available by the Company on its website or otherwise. The Company undertakes no obligation to update or supplement any forward-looking statements to reflect actual results, new information, future events, changes in its expectations or other circumstances that exist after the date as of which the forward-looking statements were made, except as required by law.
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 SEC, including this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Liquidity and Capital Resources
Sources and Uses of Cash
The Company’s primary sources of cash include rent receipts from its real estate portfolio based on contractual arrangements with its tenants, proceeds from the sales of real estate properties, joint ventures, and proceeds from public or private debt or equity offerings. As of March 31, 2024, the Company had $1.4 billion available to be drawn on its unsecured credit facility ("Unsecured Credit Facility") and available cash.
The Company expects to continue to meet its liquidity needs, including funding additional investments, paying dividends, and funding debt service, through cash flows from operations and liquidity sources, including the
20
Unsecured Credit Facility. Management believes that the Company's 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, 2024 were funded from cash flows from operations and the Unsecured Credit Facility, as cash flows from operations were not adequate to fully fund dividends, primarily as a result of the timing of interest payments. The Company expects that cash flows from property operations will generate sufficient cash flows such that dividends for the full year 2024 can be funded by cash flows from operations or other sources of liquidity described above.
Investing Activities
Cash flows used in investing activities for the three months ended March 31, 2024 were approximately $58.6 million. Below is a summary of the investing activities.
Acquisitions
The Company had no acquisitions for the three months ended March 31, 2024.
Dispositions
The Company had no real estate dispositions during the three months ended March 31, 2024.
Subsequent to March 31, 2024, the Company disposed of two medical outpatient buildings totaling 39,000 square feet for $5.8 million. The two properties were held for sale as of March 31, 2024.
Capital Expenditures
During the three months ended March 31, 2024, the Company incurred capital expenditures totaling $58.6 million for the following:
•$10.5 million toward active development and redevelopment of properties;
•$11.1 million toward completed development and redevelopment of properties;
•$11.8 million toward first generation tenant improvements and planned capital expenditures for acquisitions;
•$19.9 million toward second generation tenant improvements; and
•$5.3 million toward capital expenditures.
Financing Activities
Cash flows used in financing activities for the three months ended March 31, 2024 were approximately $17.1 million. See Notes 4 and 7 to the Condensed Consolidated Financial Statements accompanying this report for more information about capital markets and financing activities.
Debt Activity
As of March 31, 2024, the Company had outstanding interest rate derivatives totaling $1.1 billion to hedge one-month Term SOFR. The following details the amount and rate of each swap (dollars in thousands):
| EXPIRATION DATE | AMOUNT | WEIGHTED AVERAGE RATE | ||||||
| May 2026 | $ | 275,000 | 3.74 | % | ||||
| June 2026 | 150,000 | 3.83 | % | |||||
| December 2026 | 150,000 | 3.84 | % | |||||
| June 2027 | 200,000 | 4.27 | % | |||||
| December 2027 | 300,000 | 3.93 | % | |||||
| $ | 1,075,000 | 3.92 | % | |||||
21
Changes in Mortgage Notes Payable
During the first quarter of 2024, the Company repaid in full at maturity a mortgage note payable bearing interest at a rate of 4.77% per annum with an outstanding principal balance of $11.3 million. The mortgage note encumbered a 63,012 square foot property in California. Additionally, the Company repaid in full at maturity a mortgage note payable bearing interest at a rate of 4.12% per annum with an outstanding principal balance of $5.6 million. The mortgage note encumbered a 40,324 square foot property in Georgia.
Supplemental Guarantor Information
The OP has issued unsecured notes described in Note 4 to the Company's Condensed Consolidated Financial Statements included in this report. All unsecured notes are fully and unconditionally guaranteed by the Company, and the OP is 98.6% owned by the Company. Effective January 4, 2021, the Securities and Exchange Commission (the “SEC”) adopted amendments to the financial disclosure requirements which permit subsidiary issuers of obligations guaranteed by the parent to omit separate financial statements if the consolidated financial statements of the parent company have been filed, the subsidiary obligor is a consolidated subsidiary of the parent company, the guaranteed security is debt or debt-like, and the security is guaranteed fully and unconditionally by the parent.
Accordingly, as permitted under Rule 13-01(a)(4)(vi) of Regulation S-X, the Company has excluded the summarized financial information for the OP because the assets, liabilities, and results of operations of the OP are not materially different than the corresponding amounts in the Company's consolidated financial statements and management believes such summarized financial information would be repetitive and would not provide incremental value to investors.
Operating Activities
Cash flows provided by operating activities increased from $69.2 million for the three months ended March 31, 2023 to $76.2 million for the three months ended March 31, 2024. Items impacting cash flows from operations include, but are not limited to, cash generated from property operations, interest payments and the timing related to the payment of invoices and other expenses.
The Company may, from time to time, sell properties and redeploy cash from property sales into new investments or to repay indebtedness. The income from the new investments or reduction in interest expense could be less than the income from properties sold which would adversely affect the Company's results of operations and cash flows.
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, 2023, below are some of the factors and trends that management believes may impact future operations of the Company.
Economic and Market Conditions
Rising interest rates and increased volatility in the capital markets have increased the Company’s cost and availability of debt and equity capital. Limited availability and increases in the cost of capital could adversely impact the Company’s ability to finance operations and acquire and develop properties. To the extent the Company’s tenants experience increased costs or financing difficulties due to the economic and market conditions, they may be unable or unwilling to make payments or perform their obligations when due. Additionally, increased interest rates may also result in less liquid property markets, limiting the Company’s ability to sell existing assets or obtain joint venture capital.
Expiring Leases
The Company expects that approximately 15% of its leases will expire each year in the ordinary course of business. There are 1,146 leases totaling 3.5 million square feet that will expire during the remainder of 2024. Approximately 75% of the leases expiring during the remainder of 2024 are for space in buildings located on or adjacent to hospital campuses, are distributed throughout the portfolio, and are not concentrated with any one tenant, health system or market area. The Company typically expects to retain 75% to 90% of tenants upon expiration, and the retention ratio for the first three months of the year was within this range.
22
Operating Expenses
The Company historically has experienced 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 historically has 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, 2024, leases for approximately 92% of the Company's total leased square footage allow for some recovery of operating expenses, with approximately 28% having modified gross lease structures and approximately 64% having net lease structures.
Purchase Options
Information about the Company's unexercised purchase options and the amount and basis for determination of the purchase price is detailed in the table below (dollars in thousands):
| YEAR EXERCISABLE | NUMBER OF PROPERTIES | GROSS REAL ESTATE INVESTMENT AS OF MARCH 31, 2024 1 | ||||||
Current 2 | 6 | $ | 110,891 | |||||
| 2025 | 5 | 93,860 | ||||||
| 2026 | 6 | 181,744 | ||||||
| 2027 | 4 | 110,574 | ||||||
| 2028 | 5 | 134,893 | ||||||
| 2029 | 3 | 81,846 | ||||||
| 2030 | — | — | ||||||
| 2031 | 4 | 106,016 | ||||||
| 2032 | 2 | 23,415 | ||||||
| 2033 | — | — | ||||||
2034 and thereafter 3 | 9 | 319,710 | ||||||
| Total | 44 | $ | 1,162,949 | |||||
1Includes three properties totaling $45.4 million with stated purchase prices or prices based on fixed capitalization rates.
2These purchase options have been exercisable for an average of 14.1 years.
3Includes two medical office buildings that are recorded in the line item Investment in financing receivable, net on the Company's Condensed Consolidated Balance Sheet.
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 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 Condensed Consolidated Financial Statements and other financial data included elsewhere in this Quarterly Report on Form 10-Q.
23
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, impairment, 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 debt issuance 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, non-cash financing receivable amortization, loan origination cost amortization, deferred financing fees amortization, stock-based compensation expense and rent reserves, 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. FFO, 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. FFO, Normalized FFO and FAD should be reviewed in connection with GAAP financial measures.
Management believes FFO, Normalized FFO, FFO per common 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.
24
The table below reconciles net income to FFO, Normalized FFO and FAD for the three months ended March 31, 2024 and 2023.
| THREE MONTHS ENDED MARCH 31, | ||||||||||||||
| Amounts in thousands, except per share data | 2024 | 2023 | ||||||||||||
| Net loss attributable to common stockholders | $ | (310,836) | $ | (87,125) | ||||||||||
Net loss attributable to common stockholders per diluted share 1 | $ | (0.82) | $ | (0.23) | ||||||||||
| Gain on sales of real estate properties | (22) | (1,007) | ||||||||||||
| Impairment of real estate properties | 15,937 | 26,227 | ||||||||||||
| Real estate depreciation and amortization | 181,161 | 186,109 | ||||||||||||
| Non-controlling loss from operating partnership units | (4,278) | (1,067) | ||||||||||||
| Proportionate share of unconsolidated joint ventures | 4,568 | 4,841 | ||||||||||||
| FFO adjustments | $ | 197,366 | $ | 215,103 | ||||||||||
FFO adjustments per common share - diluted | $ | 0.51 | $ | 0.56 | ||||||||||
| FFO attributable to common stockholders | $ | (113,470) | $ | 127,978 | ||||||||||
FFO attributable to common stockholders per common share - diluted 2 | $ | (0.30) | $ | 0.33 | ||||||||||
| Transaction costs | 395 | 287 | ||||||||||||
Merger-related costs 3 | — | 4,855 | ||||||||||||
| Merger-related fair value of debt instruments | 10,105 | 10,864 | ||||||||||||
| Lease intangible amortization | 175 | 146 | ||||||||||||
Allowance for credit losses 4 | — | 8,599 | ||||||||||||
| Impairment of goodwill | 250,530 | — | ||||||||||||
Unconsolidated JV normalizing items 5 | 87 | 117 | ||||||||||||
| Normalized FFO adjustments | $ | 261,292 | $ | 24,868 | ||||||||||
Normalized FFO adjustments per common share - diluted | $ | 0.68 | $ | 0.06 | ||||||||||
| Normalized FFO attributable to common stockholders | $ | 147,822 | $ | 152,846 | ||||||||||
| Normalized FFO attributable to common stockholders per common share - diluted | $ | 0.39 | $ | 0.40 | ||||||||||
| Non-real estate depreciation and amortization | 485 | 604 | ||||||||||||
Non-cash interest amortization 6 | 1,277 | 682 | ||||||||||||
| Rent reserves, net | (151) | 1,371 | ||||||||||||
| Straight-line rent, net | (7,633) | (8,246) | ||||||||||||
| Share-based compensation | 3,562 | 3,745 | ||||||||||||
Unconsolidated JV non-cash items 7 | (122) | (227) | ||||||||||||
| Normalized FFO adjusted for non-cash items | $ | 145,240 | $ | 150,775 | ||||||||||
| 2nd generation TI | (20,204) | (8,882) | ||||||||||||
| Leasing commissions paid | (15,215) | (7,013) | ||||||||||||
| Capital additions | (5,363) | (8,946) | ||||||||||||
| FAD | $ | 104,458 | $ | 125,934 | ||||||||||
FFO weighted average common shares outstanding - diluted 8 | 383,413 | 383,335 | ||||||||||||
1Potential common shares are not included in the computation of diluted earnings per share when a loss exists as the effect would be an antidilutive per share amount.
2For the three months ended March 31, 2024, basic weighted average common shares outstanding was the denominator used in the per share calculation.
3Includes costs incurred related to the Merger.
4For the three months ended March 31, 2023, includes a $5.2 million credit allowance for a mezzanine loan included in "Impairment of real estate and credit loss reserves" on the Statement of Operations and $3.4 million reserve included in “Rental Income” on the Statement of Operations for previously deferred rent and straight line rent for three skilled nursing facilities.
5Includes the Company's proportionate share of acquisition and pursuit costs related to unconsolidated joint ventures.
6Includes the amortization of deferred financing costs, discounts and premiums, and non-cash financing receivable amortization.
7Includes the Company's proportionate share of straight-line rent, net related to unconsolidated joint ventures.
8The Company utilizes the treasury stock method which includes the dilutive effect of nonvested share-based awards outstanding of 254,261 and 401,937, respectively, for the three months ended March 31, 2024 and 2023, and the diluted impact of 3,681,225 OP Units outstanding for the three months ended March 31, 2024.
25
Cash Net Operating Income ("NOI") and Same Store Cash NOI
Cash NOI and Same Store Cash NOI are key performance indicators. Management considers these to be supplemental measures that allow investors, analysts and Company management to measure unlevered property-level operating results. The Company defines Cash NOI as rental income, interest from financing receivables less property operating expenses. Cash NOI excludes non-cash items such as above and below market lease intangibles, straight-line rent, lease inducements, financing receivable amortization, tenant improvement amortization and leasing commission amortization. The Company also excludes cash lease termination fees. Cash NOI is historical and not necessarily indicative of future results.
Same Store Cash NOI compares Cash NOI for stabilized properties. Stabilized properties are properties that have been included in operations for the duration of the year-over-year comparison period presented. Accordingly, stabilized properties exclude properties that were recently acquired or disposed of, properties classified as held for sale or intended for sale, properties undergoing redevelopment, and newly redeveloped or developed properties.
The Company utilizes the redevelopment classification for properties where management has approved a change in strategic direction for such properties through the application of additional resources including an amount of capital expenditures significantly above routine maintenance and capital improvement expenditures.
Any recently acquired property will be included in the same store pool once the Company has owned the property for five full quarters. Newly developed or redeveloped properties will be included in the same store pool five full quarters after substantial completion.
The following table reflects the Company's Same Store Cash NOI for the three months ended March 31, 2024 and 2023.
| NUMBER OF PROPERTIES | GROSS INVESTMENT at March 31, 2024 | SAME STORE CASH NOI for the three months ended March 31, | ||||||||||||
| Dollars in thousands | 2024 | 2023 | ||||||||||||
| Same store properties | 624 | $ | 12,512,764 | $ | 191,222 | $ | 185,796 | |||||||
| Joint venture same store properties | 33 | 352,845 | $ | 4,833 | $ | 4,563 | ||||||||
The following tables reconcile net income to Same Store NOI and the same store property metrics to the total owned real estate portfolio for the three months ended March 31, 2024 and 2023:
Reconciliation of Same Store Cash NOI
| SAME STORE RECONCILIATION | ||||||||
| THREE MONTHS ENDED MARCH 31, | ||||||||
| Dollars in thousands | 2024 | 2023 | ||||||
| Net loss | $ | (315,220) | $ | (88,078) | ||||
| Other expense | 327,646 | 94,407 | ||||||
| General and administrative expense | 14,787 | 14,935 | ||||||
| Depreciation and amortization expense | 178,119 | 184,479 | ||||||
Other expenses 1 | 4,727 | 7,940 | ||||||
| Straight-line rent, net | (7,633) | (8,245) | ||||||
| Joint venture properties | 4,958 | 4,769 | ||||||
Other revenue 2 | (7,006) | (733) | ||||||
| Cash NOI | 200,378 | 209,474 | ||||||
| Cash NOI not included in same store | (4,323) | (19,115) | ||||||
| Same store cash NOI | 196,055 | 190,359 | ||||||
| Same store joint venture properties | (4,833) | (4,563) | ||||||
| Same store cash NOI (excluding JVs) | $ | 191,222 | $ | 185,796 | ||||
1.Includes transaction costs, Merger-related costs, rent reserves, above and below market ground lease intangible amortization, leasing commission amortization and ground lease straight-line rent expense.
2.Includes management fee income, interest, above and below market lease intangible amortization, lease inducement amortization, lease terminations and tenant improvement overage amortization.
26
Reconciliation of Same Store Properties
| AS OF MARCH 31, 2024 | ||||||||||||||
| Dollars and square feet in thousands | PROPERTY COUNT | GROSS INVESTMENT 1 | SQUARE FEET | OCCUPANCY | ||||||||||
Same store properties | 624 | $ | 12,512,764 | 36,101 | 89.5 | % | ||||||||
| Joint venture same store properties | 33 | 352,845 | 1,913 | 86.2 | % | |||||||||
| Wholly owned and joint venture acquisitions | 3 | 50,838 | 195 | 97.8 | % | |||||||||
| Development completions | 4 | 95,195 | 335 | 64.5 | % | |||||||||
| Redevelopments | 18 | 440,632 | 1,503 | 51.7 | % | |||||||||
| Planned Dispositions | 5 | 61,505 | 228 | 25.9 | % | |||||||||
| Total | 687 | $ | 13,513,779 | 40,275 | 87.4 | % | ||||||||
| Joint venture properties | 34 | 360,501 | 1,949 | 86.5 | % | |||||||||
| Total owned real estate properties | 653 | $ | 13,153,278 | 38,326 | 87.5 | % | ||||||||
1Excludes assets held for sale, construction in progress, land held for development, corporate property and financing lease right-of-use assets unrelated to an imputed lease arrangement as a result of a sale leaseback transaction.
Results of Operations
Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023
The Company’s results of operations for the three months ended March 31, 2024 compared to the same period in 2023 were impacted by acquisitions, developments, dispositions, gains on sale, and capital markets transactions.
Revenues
Rental income decreased $6.0 million, or 1.9%, for the three months ended March 31, 2024 compared to the prior year period. This decrease is primarily comprised of the following:
•Acquisitions in 2023 contributed $1.1 million.
•Leasing activity, including contractual rent increases, contributed $8.3 million.
•Dispositions in 2023 resulted in a decrease of $15.4 million.
Other operating income decreased $0.4 million, or 9.2%, for the three months ended March 31, 2024 compared to the prior year period primarily as a result of variable parking and management fees.
Expenses
Property operating expenses decreased $1.0 million, or 0.8%, for the three months ended March 31, 2024 compared to the prior year period primarily as a result of the following activity:
•Acquisitions in 2023 resulted in an increase of $0.5 million.
•Increases in portfolio operating expenses as follows:
◦Utilities expense of $2.0 million;
◦Administrative, leasing commissions, and other legal expense of $3.0 million;
◦Maintenance and repair expense of $2.2 million;
◦Property taxes of $0.3 million;
◦Janitorial expense of $0.7 million; and
◦Insurance expense of $0.2 million.
•Decrease in compensation expense of $1.5 million.
•Dispositions in 2023 resulted in a decrease of $8.4 million.
General and administrative expenses decreased approximately $0.1 million, or 1.0%, for the three months ended March 31, 2024 compared to the prior year period primarily as a result of the following activity:
•Decrease in payroll and payroll related expenses of approximately $0.9 million.
27
•Increase in cash compensation incentive expense of $0.7 million.
•Increase in non-cash compensation incentive expense of $0.5 million.
•Other decreases included legal and other administrative costs of $0.4 million.
Merger-related costs decreased $4.9 million for the three months ended March 31, 2024 compared to the prior year period primarily due to 2023 legal and consulting services in connection with the Merger.
Depreciation and amortization expense decreased $6.4 million, or 3.4%, for the three months ended March 31, 2024 compared to the prior year period primarily as a result of the following activity:
•Acquisitions in 2023 resulted in an increase of $0.7 million.
•Various building and tenant improvement expenditures resulted in an increase of $13.0 million.
•Dispositions in 2023 resulted in a decrease of $11.5 million.
•Assets that became fully depreciated resulted in a decrease of $8.6 million.
Other Income (Expense)
Gains on sale of real estate properties.
The Company had no real estate dispositions in the first quarter of 2024. In the first quarter of 2023, the Company recognized gains of approximately $1.0 million primarily on the disposition of one property.
Interest expense
Interest expense decreased $2.7 million, or 4.2%, for the three months ended March 31, 2024 compared to the prior year period. The components of interest expense are as follows:
| THREE MONTHS ENDED MARCH 31, | CHANGE | |||||||||||||
| Dollars in thousands | 2024 | 2023 | $ | % | ||||||||||
| Contractual interest | $ | 49,458 | $ | 50,766 | $ | (1,308) | (2.6) | % | ||||||
| Net discount/premium accretion | 10,067 | 9,591 | 476 | 5.0 | % | |||||||||
| Debt issuance costs amortization | 1,207 | 1,476 | (269) | (18.2) | % | |||||||||
| Amortization of interest rate swap settlement | 42 | 42 | — | — | % | |||||||||
| Amortization of treasury hedge settlement | 107 | 107 | — | — | % | |||||||||
| Fair value derivative | 177 | 1,429 | (1,252) | (87.6) | % | |||||||||
| Interest cost capitalization | (942) | (570) | (372) | 65.3 | % | |||||||||
| Interest on lease liabilities | 938 | 918 | 20 | 2.2 | % | |||||||||
| Total interest expense | $ | 61,054 | $ | 63,759 | $ | (2,705) | (4.2) | % | ||||||
Contractual interest expense decreased $1.3 million, or 2.6%, for the three months ended March 31, 2024 compared to the prior year period primarily as a result of the following activity:
•The Unsecured Term Loans accounted for an increase of approximately $3.3 million.
•The Unsecured Credit Facility accounted for a decrease of approximately $4.0 million due to a decreased weighted average balance outstanding.
•Active interest rate derivatives accounted for a decrease of $0.3 million.
•Mortgage note repayments, net of assumptions, accounted for a decrease of approximately $0.3 million.
Impairment of Real Estate Properties
In the first quarter of 2024, the Company recognized impairments totaling $15.9 million on four properties with changes in the expected holding periods, including one property reclassified to held for sale.
Impairment of Goodwill
The Company determined that the carrying value if its single reporting unit exceeded estimated fair value and therefore recorded a $250.5 million full impairment of its goodwill, which is recorded as a non-cash charge in “Impairment of goodwill” in the consolidated statements of operations. See Note 1 to the Condensed Consolidated Financial Statements accompanying this report for more details.
28
Equity loss from unconsolidated joint ventures
The Company recognized its proportionate share of losses from its unconsolidated joint ventures. These losses are primarily attributable to non-cash depreciation expense. See Note 2 to the Condensed Consolidated Financial Statements accompanying this report for more details regarding the Company's unconsolidated joint ventures.
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. Management uses regular monitoring of market conditions and analysis techniques to manage this risk. During the three months ended March 31, 2024, 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, 2023.
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.
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. 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 and the risk factor discussed below, 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, 2023, 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, 2023, 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.
Risk Factors Relating to the Company
Operational Risks
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, including the
29
loss of licensure or certification. 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. The Company leases to government tenants from time to time that may be subject to annual budget appropriations. If a government tenant fails to receive its annual budget appropriation, it might not be able to make its lease payments to the Company. In addition, defaults under leases with federal government tenants are governed by federal statute and not by state eviction or rent deficiency laws. 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. For example, Steward Health Care System LLC (“Steward”), leases approximately 580,000 square feet of space from the Company, accounting for approximately 1.6% of the Company’s total in-place annualized base rent at March 31, 2024. On May 6, 2024, Steward announced that it had filed petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Texas. The bankruptcy filing by Steward could delay the Company’s efforts to collect past due balances under the leases or ultimately preclude collection of these amounts. As of April 30, 2024, Steward owes the Company approximately $2.6 million in rent. There can be no assurance that Steward will meet its financial obligations to the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended March 31, 2024, the Company withheld and canceled 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 | — | $ | — | — | — | |||||||||
February 1 - February 29 | 8,228 | 16.31 | — | — | ||||||||||
March 1 - March 31 | — | — | — | — | ||||||||||
| Total | 8,228 | $ | 16.31 | |||||||||||
In April 2024, the Company repurchased 2,966,764 shares of its common stock at a weighted-average price of $14.07 for a total of $41.7 million.
Item 5. Other Information
During the three months ended March 31, 2024, no director or officer of the Company adopted terminated
Item 6. Exhibits
| EXHIBIT | DESCRIPTION | |||||||
| Exhibit 3.1 | ||||||||
| Exhibit 3.2 | ||||||||
| Exhibit 3.4 | ||||||||
| Exhibit 3.5 | ||||||||
| Exhibit 4.1 | ||||||||
30
| Exhibit 101.INS | The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| Exhibit 101.SCH | XBRL Taxonomy Extension Schema Document (furnished electronically herewith) | |||||||
| Exhibit 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document (furnished electronically herewith) | |||||||
| Exhibit 101.LAB | XBRL Taxonomy Extension Labels Linkbase Document (furnished electronically herewith) | |||||||
| Exhibit 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document (furnished electronically herewith) | |||||||
| Exhibit 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document (furnished electronically herewith) | |||||||
1 Filed as an exhibit to the Company's (File No. 001-35568) Form 10-Q filed with the SEC on August 8, 2023 and hereby incorporated by reference.
2 Filed as an exhibit to Legacy HTA's (File No. 001-35568) Form 8-K filed with the SEC on April 29, 2020 and hereby incorporated by reference.
3 Filed as an exhibit to the Company's (File No. 001-35568) Form 8-K filed with the SEC on July 26, 2022 and hereby incorporated by reference.
31
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/ J. CHRISTOPHER DOUGLAS | |||||||
| J. Christopher Douglas | ||||||||
| Executive Vice President and Chief Financial Officer | ||||||||
| May 7, 2024 | ||||||||
32
Exhibit 22
LIST OF SUBSIDIARY ISSUERS OF GUARANTEED SECURITIES
As of March 31, 2024, Healthcare Realty Trust Incorporated is the guarantor of the outstanding debt securities of its subsidiaries, as listed below.
Debt Instrument | Issuer | ||||
| 3.88% Senior Notes due 2025 | Healthcare Realty Holdings, L.P. | ||||
| 3.50% Senior Notes due 2026 | Healthcare Realty Holdings, L.P. | ||||
| 3.75% Senior Notes due 2027 | Healthcare Realty Holdings, L.P. | ||||
| 3.63% Senior Notes due 2028 | Healthcare Realty Holdings, L.P. | ||||
| 3.10% Senior Notes due 2030 | Healthcare Realty Holdings, L.P. | ||||
| 2.40% Senior Notes due 2030 | Healthcare Realty Holdings, L.P. | ||||
| 2.05% Senior Notes due 2031 | Healthcare Realty Holdings, L.P. | ||||
| 2.00% Senior Notes due 2031 | Healthcare Realty Holdings, L.P. | ||||
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302
Exhibit 31.1
Healthcare Realty Trust Incorporated
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Todd J. Meredith, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Healthcare Realty Trust Incorporated;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: | May 7, 2024 | |||||||
/s/ TODD J. MEREDITH | ||||||||
Todd J. Meredith | ||||||||
President and Chief Executive Officer | ||||||||
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302
Exhibit 31.2
Healthcare Realty Trust Incorporated
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, J. Christopher Douglas, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Healthcare Realty Trust Incorporated;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: | May 7, 2024 | |||||||
/s/ J. CHRISTOPHER DOUGLAS | ||||||||
J. Christopher Douglas | ||||||||
Executive Vice President and Chief Financial Officer | ||||||||
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350 SECTION 906
Exhibit 32
Healthcare Realty Trust Incorporated
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Healthcare Realty Trust Incorporated (the “Company”) on Form 10-Q for the quarter ended March 31, 2024, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Todd J. Meredith, President and Chief Executive Officer of the Company, and I, J. Christopher Douglas, Executive Vice President and Chief Financial Officer of the Company, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1.The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: | May 7, 2024 | |||||||
/s/ TODD J. MEREDITH | ||||||||
Todd J. Meredith | ||||||||
President and Chief Executive Officer | ||||||||
/s/ J. CHRISTOPHER DOUGLAS | ||||||||
J. Christopher Douglas | ||||||||
Executive Vice President and Chief Financial Officer | ||||||||