Item 1. Financial Statements
Healthcare Realty Trust Incorporated
Condensed Consolidated Balance Sheets
Amounts in thousands, except per share data
| | | | | | | | |
| ASSETS | | |
| Unaudited SEPTEMBER 30, 2022 | DECEMBER 31, 2021 |
| Real estate properties | | |
| Land | $ | 1,449,550 | | $ | 387,918 | |
| Buildings and improvements | 11,439,797 | | 4,337,641 | |
| Lease intangibles | 968,914 | | 120,478 | |
| Personal property | 11,680 | | 11,761 | |
| Investment in financing receivable, net | 118,919 | | 186,745 | |
| Financing lease right-of-use assets | 79,950 | | 31,576 | |
| Construction in progress | 43,148 | | 3,974 | |
| Land held for development | 73,321 | | 24,849 | |
| Total real estate properties | 14,185,279 | | 5,104,942 | |
| Less accumulated depreciation and amortization | (1,468,736) | | (1,338,743) | |
| Total real estate properties, net | 12,716,543 | | 3,766,199 | |
| Cash and cash equivalents | 57,583 | | 13,175 | |
| | |
| | |
| Assets held for sale, net | 185,074 | | 57 | |
| Operating lease right-of-use assets | 321,365 | | 128,386 | |
| Investments in unconsolidated joint ventures | 327,752 | | 161,942 | |
| Goodwill | 148,891 | | 3,487 | |
| Other assets, net | 438,235 | | 185,673 | |
| Total assets | $ | 14,195,443 | | $ | 4,258,919 | |
| | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | |
| Liabilities | | |
| Notes and bonds payable | $ | 5,570,139 | | $ | 1,801,325 | |
| Accounts payable and accrued liabilities | 231,018 | | 86,108 | |
| Liabilities of assets held for sale | 10,644 | | 294 | |
| Operating lease liabilities | 268,840 | | 96,138 | |
| Financing lease liabilities | 72,378 | | 22,551 | |
| Other liabilities | 203,398 | | 67,387 | |
| Total liabilities | 6,356,417 | | 2,073,803 | |
| Commitments and contingencies | | |
| Stockholders' equity | | |
Preferred stock, $.01 par value per share; 200,000 shares authorized; none issued and outstanding | — | | — | |
Class A Common stock, $.01 par value per share; 1,000,000 shares authorized; 380,572 and 150,457 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively | 3,806 | | 1,505 | |
| Additional paid-in capital | 9,586,556 | | 3,972,917 | |
| Accumulated other comprehensive income (loss) | 5,524 | | (9,981) | |
| Cumulative net income attributable to common stockholders | 1,342,819 | | 1,266,158 | |
| Cumulative dividends | (3,211,492) | | (3,045,483) | |
| Total stockholders' equity | 7,727,213 | | 2,185,116 | |
| Non-controlling interest | 111,813 | | — | |
| Total equity | 7,839,026 | | 2,185,116 | |
| Total liabilities and equity | $ | 14,195,443 | | $ | 4,258,919 | |
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, 2021, are an integral part of these financial statements.
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Income
For the Three and Nine Months Ended September 30, 2022 and 2021
Amounts in thousands, except per share data
Unaudited
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED
September 30, | NINE MONTHS ENDED
September 30, |
| 2022 | 2021 | 2022 | 2021 |
| Revenues | | | | |
| Rental income | $ | 298,931 | | $ | 131,746 | | $ | 578,052 | | $ | 388,620 | |
| Interest income | 3,366 | | 1,917 | | 7,253 | | 2,426 | |
| | | | |
| Other operating | 4,057 | | 2,969 | | 9,270 | | 7,347 | |
| 306,354 | | 136,632 | | 594,575 | | 398,393 | |
| Expenses | | | | |
| Property operating | 112,473 | | 55,518 | | 226,947 | | 159,241 | |
| General and administrative | 16,741 | | 8,207 | | 38,317 | | 25,251 | |
| Acquisition and pursuit costs | 482 | | 974 | | 3,137 | | 2,388 | |
| Merger-related costs | 79,402 | | — | | 92,603 | | — | |
| Depreciation and amortization | 158,117 | | 50,999 | | 267,889 | | 150,904 | |
| | | | |
| | | | |
| 367,215 | | 115,698 | | 628,893 | | 337,784 | |
| Other income (expense) | | | | |
| Gain on sales of real estate properties | 143,908 | | 1,186 | | 197,188 | | 41,046 | |
| Interest expense | (53,044) | | (13,334) | | (82,248) | | (39,857) | |
| Loss on extinguishment of debt | (1,091) | | — | | (2,520) | | — | |
| | | | |
| Impairment of real estate properties | — | | (10,669) | | 25 | | (16,581) | |
| Equity loss from unconsolidated joint ventures | (124) | | (183) | | (776) | | (404) | |
| Interest and other (expense) income, net | (172) | | — | | (378) | | 239 | |
| 89,477 | | (23,000) | | 111,291 | | (15,557) | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Net income (loss) | $ | 28,616 | | $ | (2,066) | | $ | 76,973 | | $ | 45,052 | |
| Net income attributable to non-controlling interests | (312) | | — | | (312) | | — | |
| Net income (loss) attributable to common stockholders | $ | 28,304 | | $ | (2,066) | | $ | 76,661 | | $ | 45,052 | |
| | | | |
| | | | |
| | | | |
| Basic earnings per common share | $ | 0.08 | | $ | (0.02) | | $ | 0.36 | | $ | 0.31 | |
| | | | |
| | | | |
| Diluted earnings per common share | $ | 0.08 | | $ | (0.02) | | $ | 0.35 | | $ | 0.31 | |
| | | | |
| Weighted average common shares outstanding - basic | 328,805 | | 143,818 | | 209,807 | | 141,521 | |
| Weighted average common shares outstanding - diluted | 332,031 | | 143,818 | | 210,944 | | 141,613 | |
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, 2021, are an integral part of these financial statements.
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Comprehensive Income
For the Three and Nine Months Ended September 30, 2022 and 2021
Amounts in thousands
Unaudited
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED
September 30, | NINE MONTHS ENDED
September 30, |
| 2022 | 2021 | 2022 | 2021 |
| Net income (loss) | $ | 28,616 | | $ | (2,066) | | $ | 76,973 | | $ | 45,052 | |
| Other comprehensive income | | | | |
| | | | |
| | | | |
| Interest rate swaps | | | | |
| Reclassification adjustments for losses included in net income (interest expense) | 763 | | 1,131 | | 2,672 | | 3,340 | |
| Gains arising during the period on interest rate swaps | 6,083 | | 36 | | 12,905 | | 2,079 | |
| | | | |
| 6,846 | | 1,167 | | 15,577 | | 5,419 | |
| Comprehensive income (loss) | 35,462 | | (899) | | 92,550 | | 50,471 | |
| Less: comprehensive income attributable to non-controlling interests | (384) | | — | | (384) | | — | |
| Comprehensive income (loss) attributable to common stockholders | $ | 35,078 | | $ | (899) | | $ | 92,166 | | $ | 50,471 | |
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, 2021, are an integral part of these financial statements.
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Equity
For the Three Months Ended September 30, 2022 and 2021
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 |
| Balance at June 30, 2022 | $ | 1,516 | | $ | 4,002,525 | | $ | (1,250) | | $ | 1,314,515 | | $ | (3,139,440) | | $ | 2,177,866 | | $ | — | | $ | 2,177,866 | |
| Issuance of common stock, net of issuance costs | — | | 84 | | — | | — | | — | | 84 | | — | | 84 | |
| Merger consideration transferred | 2,289 | | 5,574,174 | | — | | — | | — | | 5,576,463 | | 110,702 | | 5,687,165 | |
| Non-controlling interests acquired | — | | — | | — | | — | | — | | — | | 1,266 | | 1,266 | |
| Common stock redemptions | — | | (41) | | — | | — | | — | | (41) | | — | | (41) | |
| Share-based compensation | 1 | | 9,716 | | — | | — | | — | | 9,717 | | — | | 9,717 | |
| Redemption of non-controlling interest | — | | 98 | | — | | — | | — | | 98 | | (97) | | 1 | |
| Net income | — | | — | | — | | 28,304 | | — | | 28,304 | | 312 | | 28,616 | |
Reclassification adjustments for losses included in net income (interest expense)
| — | | — | | 755 | | — | | — | | 755 | | 8 | | 763 | |
Gains arising during the period on
interest rate swaps
| — | | — | | 6,019 | | — | | — | | 6,019 | | 64 | | 6,083 | |
Dividends to common stockholders ($0.31 per share) | — | | — | | — | | — | | (72,052) | | (72,052) | | (442) | | (72,494) | |
| Balance at September 30, 2022 | $ | 3,806 | | $ | 9,586,556 | | $ | 5,524 | | $ | 1,342,819 | | $ | (3,211,492) | | $ | 7,727,213 | | $ | 111,813 | | $ | 7,839,026 | |
| | | | | | | | |
| Common
Stock | Additional
Paid-In
Capital | Accumulated
Other
Comprehensive
Income (Loss) | Cumulative
Net Income | Cumulative
Dividends | Total
Stockholders’
Equity | Non-controlling Interests | Total
Equity |
| Balance at June 30, 2021 | $ | 1,455 | | $ | 3,818,592 | | $ | (13,580) | | $ | 1,246,617 | | $ | (2,956,830) | | $ | 2,096,254 | | $ | — | | $ | 2,096,254 | |
| Issuance of common stock, net of issuance costs | 20 | | 61,442 | | — | | — | | — | | 61,462 | | — | | 61,462 | |
| Common stock redemptions | — | | — | | — | | — | | — | | — | | — | | — | |
| Share-based compensation | — | | 2,538 | | — | | — | | — | | 2,538 | | — | | 2,538 | |
| Net loss | — | | — | | — | | (2,066) | | — | | (2,066) | | — | | (2,066) | |
Reclassification adjustments for losses included in net income (interest expense)
| — | | — | | 1,131 | | — | | — | | 1,131 | | — | | 1,131 | |
Losses arising during the period on interest rate swaps
| — | | — | | 36 | | — | | — | | 36 | | — | | 36 | |
Dividends to common stockholders ($0.3025 per share) | — | | — | | — | | — | | (44,022) | | (44,022) | | — | | (44,022) | |
| Balance at September 30, 2021 | $ | 1,475 | | $ | 3,882,572 | | $ | (12,413) | | $ | 1,244,551 | | $ | (3,000,852) | | $ | 2,115,333 | | $ | — | | $ | 2,115,333 | |
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, 2021, are an integral part of these financial statements.
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Equity
For the Nine Months Ended September 30, 2022 and 2021
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 Interest | Total Equity | | | | | |
| Balance at December 31, 2021 | $ | 1,505 | | $ | 3,972,917 | | $ | (9,981) | | $ | 1,266,158 | | $ | (3,045,483) | | $ | 2,185,116 | | $ | — | | $ | 2,185,116 | | | | | | |
| Issuance of common stock, net of issuance costs | 8 | | 22,847 | | — | | — | | — | | 22,855 | | — | | 22,855 | | | | | | |
| Merger consideration transferred | 2,289 | | 5,574,174 | | — | | — | | — | | 5,576,463 | | 110,702 | | 5,687,165 | | | | | | |
| Non-controlling interests acquired | — | | — | | — | | — | | — | | — | | 1,266 | | 1,266 | | | | | | |
| Common stock redemptions | — | | (248) | | — | | — | | — | | (248) | | — | | (248) | | | | | | |
| Share-based compensation | 4 | | 16,768 | | — | | — | | — | | 16,772 | | — | | 16,772 | | | | | | |
| Redemption of non-controlling interest | — | | 98 | | — | | — | | — | | 98 | | (97) | | 1 | | | | | | |
| Net Income | — | | — | | — | | 76,661 | | — | | 76,661 | | 312 | | 76,973 | | | | | | |
Reclassification adjustments for losses included in net income (interest expense)
| — | | — | | 2,664 | | — | | — | | 2,664 | | 8 | | 2,672 | | | | | | |
Gains arising during the period on
interest rate swaps | — | | — | | 12,841 | | — | | — | | 12,841 | | 64 | | 12,905 | | | | | | |
Dividends to common stockholders ($0.93 per share) | — | | — | | — | | — | | (166,009) | | (166,009) | | (442) | | (166,451) | | | | | | |
| Balance at September 30, 2022 | $ | 3,806 | | $ | 9,586,556 | | $ | 5,524 | | $ | 1,342,819 | | $ | (3,211,492) | | $ | 7,727,213 | | $ | 111,813 | | $ | 7,839,026 | | | | | | |
| | | | | | | | | | | | | |
| Common
Stock | Additional
Paid-In
Capital | Accumulated
Other
Comprehensive
Income (Loss) | Cumulative
Net Income | Cumulative
Dividends | Total
Stockholders’
Equity | Non-controlling Interest | Total Equity | | | | | |
| Balance at December 31, 2020 | $ | 1,395 | | $ | 3,635,341 | | $ | (17,832) | | $ | 1,199,499 | | $ | (2,870,027) | | $ | 1,948,376 | | $ | — | | $ | 1,948,376 | | | | | | |
| Issuance of common stock, net of issuance costs | 78 | | 240,660 | | — | | — | | — | | 240,738 | | — | | 240,738 | | | | | | |
| Common stock redemptions | — | | (1,610) | | — | | — | | — | | (1,610) | | — | | (1,610) | | | | | | |
| Share-based compensation | 2 | | 8,181 | | — | | — | | — | | 8,183 | | — | | 8,183 | | | | | | |
| Net income | — | | — | | — | | 45,052 | | — | | 45,052 | | — | | 45,052 | | | | | | |
Reclassification adjustments for losses included in net income (interest expense)
| — | | — | | 3,340 | | — | | — | | 3,340 | | — | | 3,340 | | | | | | |
Gains arising during the period on interest rate swaps
| — | | — | | 2,079 | | — | | — | | 2,079 | | — | | 2,079 | | | | | | |
Dividends to common stockholders ($0.9075 per share) | — | | — | | — | | — | | (130,825) | | (130,825) | | — | | (130,825) | | | | | | |
| Balance at September 30, 2021 | $ | 1,475 | | $ | 3,882,572 | | $ | (12,413) | | $ | 1,244,551 | | $ | (3,000,852) | | $ | 2,115,333 | | $ | — | | $ | 2,115,333 | | | | | | |
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, 2021, are an integral part of these financial statements.
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2022 and 2021
Amounts in thousands
Unaudited
| | | | | | | | |
| OPERATING ACTIVITIES | | |
| NINE MONTHS ENDED
September 30, |
| 2022 | 2021 |
| Net income | $ | 76,973 | | $ | 45,052 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| Depreciation and amortization | 267,889 | | 150,904 | |
| Other amortization | 11,875 | | 2,721 | |
| Share-based compensation | 16,772 | | 8,183 | |
| Amortization of straight-line rent receivable (lessor) | (12,267) | | (4,574) | |
| Amortization of straight-line rent on operating leases (lessee) | 2,016 | | 1,115 | |
| Gain on sales of real estate properties | (197,188) | | (41,046) | |
| Loss on extinguishment of debt | 2,520 | | — | |
| Impairment of real estate properties | (25) | | 16,581 | |
| Equity loss from unconsolidated joint ventures | 776 | | 404 | |
| Distributions from unconsolidated joint ventures | 893 | | — | |
| | |
| Non-cash interest from financing and notes receivable | (1,901) | | (196) | |
| Changes in operating assets and liabilities: | | |
| Other assets, including right-of-use-assets | (19,230) | | (9,947) | |
| Accounts payable and accrued liabilities | 35,769 | | 215 | |
| Other liabilities | (58,213) | | 843 | |
| Net cash provided by operating activities | 126,659 | | 170,255 | |
| | |
| INVESTING ACTIVITIES | | |
| Acquisitions of real estate | (376,924) | | (250,766) | |
| Development of real estate | (17,572) | | (2,020) | |
| Additional long-lived assets | (97,797) | | (69,647) | |
| Funding of mortgages and notes receivable | (3,441) | | — | |
| Investments in unconsolidated joint ventures | (99,586) | | (49,612) | |
| Investment in financing receivable | 167 | | (104,654) | |
| Proceeds from sales of real estate properties and additional long-lived assets | 870,806 | | 112,029 | |
| Proceeds from notes receivable repayments | 500 | | — | |
| Cash assumed in Merger, including restricted cash for special dividend payment | 1,149,681 | | — | |
| | |
| Net cash provided by (used in) investing activities | 1,425,834 | | (364,670) | |
| | |
| FINANCING ACTIVITIES | | |
| Net (repayments)/borrowings on unsecured credit facility | (154,400) | | 90,500 | |
| Borrowings on term loans | 666,500 | | — | |
| Repayment on term loan | (718,500) | | — | |
| | |
| Repayments of notes and bonds payable | (18,880) | | (2,914) | |
| | |
| Redemption of notes and bonds payable | (2,184) | | — | |
| Dividends paid | (165,735) | | (130,825) | |
| Special dividend paid in relation to the Merger | (1,123,648) | | — | |
| | |
| Net proceeds from issuance of common stock | 22,851 | | 240,779 | |
| Common stock redemptions | (894) | | (2,014) | |
| Distributions to non-controlling interest holders | (442) | | — | |
| | |
| | |
| Debt issuance and assumption costs | (12,753) | | (252) | |
| Payments made on finance leases | — | | (162) | |
| Net cash (used in) provided by financing activities | (1,508,085) | | 195,112 | |
| | |
| Increase in cash and cash equivalents | 44,408 | | 697 | |
| Cash and cash equivalents at beginning of period | 13,175 | | 15,303 | |
| Cash and cash equivalents at end of period | $ | 57,583 | | $ | 16,000 | |
| | |
| | |
| | |
| | | | | | | | |
| Supplemental Cash Flow Information | | |
| NINE MONTHS ENDED
September 30, |
| 2022 | 2021 |
| Interest paid | $ | 83,382 | | $ | 40,653 | |
| Invoices accrued for construction, tenant improvements and other capitalized costs | $ | 52,840 | | $ | 11,663 | |
| | |
| Capitalized interest | $ | 848 | | $ | 187 | |
| | |
| | |
| | |
| | |
| | |
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, 2021, are an integral part of these financial statements.
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Business Overview
Healthcare Realty Trust Incorporated 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 September 30, 2022, the Company had gross investments of approximately $14.2 billion in 695 real estate properties, construction in progress, redevelopments, financing receivables, financing lease right-of-use assets, land held for development and corporate property. The Company's 695 real estate properties are located in 35 states and total approximately 40.7 million square feet. The Company provided leasing and property management services to approximately 38.9 million square feet nationwide. As of September 30, 2022, the Company had a weighted average ownership interest of approximately 49% in 33 real estate properties held in joint ventures. See Note 3 below for more details regarding the Company's unconsolidated joint ventures. Any references to square footage or occupancy percentage, and any amounts derived from these values in these notes to the Company's Condensed Consolidated Financial Statements, are outside the scope of our independent registered public accounting firm’s review.
Basis of Presentation
For purposes of this Quarterly Report on Form 10-Q, references to the “Company” are to Legacy HR for periods prior to the closing of the Merger and thereafter to Legacy HR and Legacy HTA after giving effect to the Merger. The Merger is described in more detail in Note 2 to these Condensed Consolidated Financial Statements. 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. However, except as disclosed herein and specific disclosures incorporated as a result of the Merger, management believes there has been no material change in the information disclosed in the Notes to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. 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, 2021. 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, 2022 for many reasons including, but not limited to, the Merger (as discussed in more detail in Note 2 below), 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, as of September 30, 2022, the accounts of the Company, its wholly owned subsidiaries, and joint ventures and partnerships where the Company controls the operating activities. The interests not owned by the Company are presented as non-controlling interests on the accompanying Condensed Consolidated Balance Sheets and Statements of Operations, Condensed Consolidated Statements of Comprehensive Income, and Condensed Consolidated Statements of Equity. 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 810 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 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. 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 and the disposition of all or a portion of an interest held by the primary beneficiary. The Company performs this analysis on an ongoing basis. As of September 30, 2022, the Company
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
identified three entities that qualified as VIE's because the limited partners in these partnerships, although entitled to vote on certain matters, do not possess kick-out rights or substantive participating rights. Two of the entities are consolidated and one is unconsolidated.
Holders of operating partnership units (“OP Units”) are considered to be non-controlling interest holders in the OP and their ownership interests are reflected as equity on the accompanying Condensed Consolidated Balance Sheets. Further, a portion of the earnings and losses of the OP are allocated to non-controlling interest holders based on their respective ownership percentages. Upon conversion of OP Units to common stock, any difference between the fair value of the common stock issued and the carrying value of the OP Units converted to common stock is recorded as a component of equity. As of September 30, 2022, there were approximately 4.0 million, or 1.1%, of OP Units issued and outstanding held by non-controlling interest holders. Additionally, the Company is the primary beneficiary of this VIE. Accordingly, the Company consolidates the interests in the OP. However, because the Company holds what is deemed to be significantly all of the OP, it qualifies for the exemption from providing certain disclosure requirements associated with investments in VIEs.
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.
As of September 30, 2022, the Company's unconsolidated joint venture arrangements were accounted for using the equity method of accounting as the Company exercised significant influence over but did not control these entities. See Note 3 below for more details regarding the Company's unconsolidated joint ventures.
Use of Estimates in the Condensed Consolidated Financial Statements
Preparation of the Condensed Consolidated Financial Statements in accordance with GAAP requires management to make estimates and assumptions that affect amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Actual results may differ from those estimates.
Reclassifications
Certain reclassifications have been made on the Company's prior year Condensed Consolidated Balance Sheet to conform to current year presentation. Previously, the Company's Lease intangibles were included in Building, improvements and lease intangibles and Goodwill was included with Other assets, net. These amounts are now classified as separate line items on the Company's Condensed Consolidated Balance Sheets.
Investments in Leases - Financing Receivables, Net
In accordance with Accounting Standards Codification ("ASC") 842, for transactions in which the Company enters into a contract to acquire an asset and leases it back to the seller (i.e., a sale leaseback transaction), control of the asset is not considered to have transferred when the seller-lessee has a purchase option. As a result, the Company does not recognize the underlying real estate asset but instead recognizes a financial asset in accordance with ASC 310 “Receivables”.
During the first quarter of 2022, the Company reclassified the two medical office buildings in Nashville, Tennessee that were acquired in separate sale-leaseback transactions in the fourth quarter of 2021. The leases with the sellers commenced in the first quarter, which resulted in the allocation of the financing receivable totaling $73.9 million to land and building and improvements.
Real Estate Notes Receivable
Real estate notes receivable consists of mezzanine and other real estate loans, which are generally collateralized by a pledge of the borrower’s ownership interest in the respective real estate owner, a mortgage or deed of trust, and/or corporate guarantees. Real estate notes receivable are intended to be held-to-maturity and are recorded at amortized cost, net of unamortized loan origination costs and fees and allowance for credit losses. As of September 30, 2022, real estate notes receivable, net totaled $79.0 million.
Interest Income
Income from Lease Financing Receivables
For the three and nine months ended September 30, 2022, the Company recognized the related income from two financing receivables totaling $2.0 million and $5.9 million, respectively, based on an imputed interest rate over the
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
terms of the applicable lease. As a result, the interest recognized from the financing receivable will not equal the cash payments from the lease agreement.
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 Income from financing receivable, net over the life of the lease.
Income from Real Estate Notes Receivable
During the three and nine months ended September 30, 2022, the Company recognized interest income of $1.3 million related to real estate notes receivable. Unpaid interest is capitalized, with principal and any unpaid interest due on the maturity date.
Revenue from Contracts with Customers (Topic 606)
The Company recognizes certain revenue under the core principle of 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 Topic 606. To achieve the core principle, the Company applies the five step model specified in the guidance.
Revenue that is accounted for under Topic 606 is segregated on the Company’s Condensed Consolidated Statements of Income in the Other operating line item. This line item includes parking income, management fee income and other miscellaneous income. Below is a detail of the amounts by category:
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED
September 30, | NINE MONTHS ENDED
September 30, |
| in thousands | 2022 | 2021 | 2022 | 2021 |
| Type of Revenue | | | | |
| Parking income | $ | 2,428 | | $ | 2,187 | | $ | 6,100 | | $ | 5,725 | |
| | | | |
Management fee income 1 | 1,426 | | 723 | | 2,864 | | 1,381 | |
| Miscellaneous | 203 | | 59 | | 306 | | 241 | |
| $ | 4,057 | | $ | 2,969 | | $ | 9,270 | | $ | 7,347 | |
1 Includes the recovery of certain expenses under the financing receivable as outlined in the management agreement.
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
Accounting Standards Update No. 2020-04
On March 12, 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR and Term SOFR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. Management continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Note 2. Merger with HTA
On July 20, 2022 (the “Closing Date”), pursuant to the Agreement and Plan of Merger dated as of February 28, 2022 (the “Merger Agreement”), 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”).
On the Closing Date, each outstanding share of Legacy HR common stock, $0.01 par value per share (the “Legacy HR Common Stock”), was cancelled and converted into the right to receive one share of Legacy HTA class A common stock at a fixed ratio of 1.00 to 1.00. Per the terms of the Merger Agreement, Legacy HTA declared a special dividend of $4.82 (the “Special Dividend”) for each outstanding share of Legacy HTA class A common stock, $0.01 par value per share ( the “Legacy HTA Common Stock”), and the OP declared a corresponding distribution to the holders of its partnership units, payable to Legacy HTA stockholders and OP unitholders of record on July 19, 2022.
Immediately following the Merger, Legacy HR converted to a Maryland limited liability company and changed its name to HRTI, LLC and Legacy HTA changed its name to “Healthcare Realty Trust Incorporated”. In addition, the equity interests of Legacy HR were contributed by Legacy HTA by means of a contribution and assignment agreement to the OP such that Legacy HR became a wholly-owned subsidiary of the OP. As a result, Legacy HR became a part of an umbrella partnership REIT (“UPREIT”) structure, which is intended to align the corporate structure of the combined company after giving effect to the Merger and UPREIT reorganization (the “Combined Company”). 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 (the “NYSE”) under the ticker symbol “HR”.
The primary reason for the Merger was to expand the Company’s size, scale, diversification, liquidity and access to capital, in order to further enhance its competitive advantages and accelerate its investment activities.
For accounting purposes, the Merger was treated as a “reverse acquisition” in which Legacy HTA was considered the legal acquirer and Legacy HR was considered the accounting acquirer based on various factors, including, but not limited to: (i) the composition of the board of directors of the Combined Company, (ii) the composition of senior management of the Combined Company, and (iii) the premium transferred to the Legacy HTA stockholders. As a result, the historical financial statements of the accounting acquirer, Legacy HR, became the historical financial statements of the Combined Company.
The acquisition was accounted for using the acquisition method of accounting in accordance with ASC 805, which requires, among other things, the assets acquired and the liabilities assumed to be recognized at their acquisition date fair value.
The consideration transferred on the Closing Date is as follows:
| | | | | |
| Dollars in thousands | |
Shares of Legacy HTA Common Stock outstanding as of July 20, 2022 as adjusted(a) | 228,520,990 | |
| Exchange ratio | 1.00 | |
| Implied shares of Legacy HR Common Stock issued | 228,520,990 | |
Adjusted closing price of Legacy HR Common Stock on July 20, 2022(b) | $ | 24.37 | |
| Value of implied Legacy HR Common Stock issued | $ | 5,569,057 | |
Fair value of Legacy HTA restricted stock awards attributable to pre-Merger services(c) | 7,406 | |
| Consideration transferred | $ | 5,576,463 | |
(a) Includes 228,520,990 shares of Legacy HTA Common Stock as of July 20, 2022. The number of shares of HTA Common Stock presented above was based on 228,857,717 total shares of Legacy HTA Common Stock outstanding as of the Closing Date, less 192 HTA fractional shares that were paid in cash less 336,535 shares of Legacy HTA restricted stock (net of 215,764 shares of Legacy HTA restricted stock withheld). For accounting purposes, these shares and units were converted to Legacy HR Common Stock, at an exchange ratio of 1.00 per share of HTA Common Stock.
(b) For accounting purposes, the fair value of Legacy HR Common Stock issued to former holders of Legacy HTA Common Stock was based on the per share closing price of Legacy HR Common Stock on July 20, 2022.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
(c) Represents the fair value of Legacy HTA restricted shares which fully vested prior to the closing of the Merger or became fully vested as a result of the closing of the Merger and which are attributable to pre-combination services.
Preliminary Purchase Price Allocation
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the Closing Date:
| | | | | |
| Dollars in thousands | |
| ASSETS | |
| Real estate investments | |
| Land | $ | 985,926 | |
| Buildings and improvements | 6,960,418 | |
Lease intangible assets(a) | 831,920 | |
| Financing lease right-of-use assets | 9,874 | |
| Construction in progress | 10,071 | |
| Land held for development | 46,538 | |
| Total real estate investments | $ | 8,844,747 | |
| Assets held for sale, net | 707,442 | |
| Investments in unconsolidated joint ventures | 67,892 | |
| Cash and cash equivalents | 26,034 | |
| Restricted cash | 1,123,647 | |
| Operating lease right-of-use assets | 198,261 | |
Other assets, net (b) (c) | 209,163 | |
| Total assets acquired | $ | 11,177,186 | |
| |
| LIABILITIES | |
| Notes and bonds payable | $ | 3,991,300 | |
| Accounts payable and accrued liabilities | 1,227,570 | |
| Liabilities of assets held for sale | 28,677 | |
| Operating lease liabilities | 173,948 | |
| Financing lease liabilities | 10,720 | |
| Other liabilities | 203,210 | |
| Total liabilities assumed | $ | 5,635,425 | |
| Net identifiable assets acquired | $ | 5,541,761 | |
| Non-controlling interest | $ | 110,702 | |
| Goodwill | $ | 145,404 | |
(a) The weighted average amortization period for the acquired lease intangible assets is 5.5 years. |
(b) Includes $34.6 million of gross contractual accounts receivable, which approximates fair value, of which the Company preliminarily did not expect $12.3 million to be collected as of Closing Date. |
(c) Includes $78.7 million of gross contractual real estate notes receivable, the fair value of which was $74.8 million, and the Company preliminarily expects to collect substantially all of the real estate notes receivable proceeds as of the Closing Date. |
As of September 30, 2022, the Company had not finalized the determination of fair value of certain tangible and intangible assets acquired and liabilities assumed including, but not limited to real estate assets and liabilities, notes receivables and goodwill. As such, the assessment of fair value of assets acquired and liabilities assumed is preliminary and was based on information that was available at the time the Condensed Consolidated Financial Statements were prepared. The finalization of the purchase accounting assessment could result in material changes in the Company’s determination of the fair value of assets acquired and liabilities assumed, which will be recorded as measurement period adjustments in the period in which they are identified, up to one year from the Closing Date.
A preliminary estimate of approximately $145.4 million has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and liabilities assumed. The recognized goodwill is attributable to expected synergies and benefits arising from the Merger, including anticipated general and administrative cost savings and potential economies of scale benefits in both tenant
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
and vendor relationships following the closing of the Merger. None of the goodwill recognized is expected to be deductible for tax purposes.
Merger related Costs
In conjunction with the Merger, the Company incurred Merger-related costs of $79.4 million during the three months ended September 30, 2022 and $92.6 million during the nine months ended September 30, 2022, which were included within Merger-related costs in results of operations. The Merger-related costs primarily consist of legal, consulting, banking services, and other Merger-related costs.
Unaudited Pro Forma Financial Information
The Condensed Consolidated Statements of Income for the three months ended September 30, 2022 include $157.4 million of revenues and $20.6 million of net loss and for the nine months ended September 30, 2022 include $157.4 million of revenues and $20.6 million of net loss associated with the results of operations of Legacy HTA from the Merger closing date to September 30, 2022.
The following unaudited pro forma information presents a summary of our Condensed Consolidated Statements of Income for the three months and nine months ended September 30, 2022 and 2021, as if the Merger had occurred on January 1, 2021. Adjustments in the pro forma financial information include but are not limited to the following:
(i) additional depreciation and amortization expense related to the acquired tangible and intangible assets,
(ii) additional interest expense on transaction-related borrowings, including assumed debt in connection with the Merger,
(iii) additional rental income related to the assumed above and below-market leases, and straight-line rent and
(iv) Merger-related costs and other one-time, non-recurring costs.
The pro forma financial information excludes adjustments for estimated cost synergies or other effects of the integration of the Merger.
The following pro forma financial information is not necessarily indicative of the results of operations had the acquisition been effected on the assumed date, nor is it necessarily an indication of trends in future results for a number of reasons, including, but not limited to, differences between the assumptions used to prepare the pro forma information, cost savings from operating efficiencies, potential synergies, and the impact of incremental costs incurred in integrating the businesses.
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED
September 30, | NINE MONTHS ENDED
September 30, |
| Dollars in thousands | 2022 | 2021 | 2022 | 2021 |
| Total revenues | $ | 352,744 | | $ | 332,465 | | $ | 1,054,809 | | $ | 982,192 | |
| Net income | $ | 115,496 | | $ | (14,930) | | $ | 160,120 | | $ | (79,754) | |
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Note 3. Real Estate Investments
2022 Company Acquisitions
The following table details the Company's acquisitions for the nine months ended September 30, 2022:
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| Dollars in thousands | DATE ACQUIRED | PURCHASE PRICE | | | CASH
CONSIDERATION 1 | REAL ESTATE 2 | OTHER 3 | SQUARE FOOTAGE |
| Dallas, TX | 2/11/22 | $ | 8,175 | | | | $ | 8,185 | | $ | 8,202 | | $ | (17) | | 18,000 | |
San Francisco, CA 4 | 3/7/22 | 114,000 | | | | 112,986 | | 108,687 | | 4,299 | | 166,396 | |
| Q1 2022 subtotal | | 122,175 | | | | 121,171 | | 116,889 | | 4,282 | | 184,396 | |
| Atlanta, GA | 4/7/22 | 6,912 | | | | 7,054 | | 7,178 | | (124) | | 21,535 | |
| Denver, CO | 4/13/22 | 6,320 | | | | 5,254 | | 5,269 | | (15) | | 12,207 | |
Colorado Springs, CO 5 | 4/13/22 | 13,680 | | | | 13,686 | | 13,701 | | (15) | | 25,800 | |
| Seattle, WA | 4/28/22 | 8,350 | | | | 8,334 | | 8,370 | | (36) | | 13,256 | |
| Houston, TX | 4/28/22 | 36,250 | | | | 36,299 | | 36,816 | | (517) | | 76,781 | |
| Los Angeles, CA | 4/29/22 | 35,000 | | | | 35,242 | | 25,400 | | 9,842 | | 34,282 | |
| Oklahoma City, OK | 4/29/22 | 11,100 | | | | 11,259 | | 11,334 | | (75) | | 34,944 | |
Raleigh, NC 4 | 5/31/22 | 27,500 | | | | 26,710 | | 27,127 | | (417) | | 85,113 | |
Tampa, FL 5 | 6/9/22 | 18,650 | | | | 18,619 | | 18,212 | | 407 | | 55,788 | |
| Q2 2022 subtotal | | 163,762 | | | | 162,457 | | 153,407 | | 9,050 | | 359,706 | |
| Seattle, WA | 8/1/22 | 4,850 | | | | 4,806 | | 4,882 | | (76) | | 10,593 | |
| Raleigh, NC | 8/9/22 | 3,783 | | | | 3,878 | | 3,932 | | (54) | | 11,345 | |
| Jacksonville, FL | 8/9/22 | 18,195 | | | | 18,508 | | 18,583 | | (75) | | 34,133 | |
| Atlanta, GA | 8/10/22 | 11,800 | | | | 11,525 | | 12,038 | | (513) | | 43,496 | |
| Denver, CO | 8/11/22 | 14,800 | | | | 13,902 | | 13,918 | | (16) | | 34,785 | |
| Raleigh, NC | 8/18/22 | 11,375 | | | | 10,670 | | 10,547 | | 123 | | 31,318 | |
| Nashville, TN | 9/15/22 | 21,000 | | | | 20,764 | | 20,572 | | 192 | | 61,932 | |
| Austin, TX | 9/29/22 | 5,450 | | | | 5,449 | | 5,572 | | (123) | | 15,000 | |
| Q3 2022 subtotal | | 91,253 | | | | 89,502 | | 90,044 | | (542) | | 242,602 | |
| Total real estate acquisitions | | $ | 377,190 | | | | $ | 373,130 | | $ | 360,340 | | $ | 12,790 | | 786,704 | |
1Cash consideration excludes prorations of revenue and expense due to/from seller at the time of the acquisition.
2Excludes financing right of use assets.
3Includes other assets acquired, liabilities assumed, and intangibles recognized at acquisition.
4Includes three properties.
5Includes two properties.
Subsequent to September 30, 2022, the Company acquired the following property: | | | | | | | | | | | | | | | | |
| Dollars in thousands | DATE ACQUIRED | PURCHASE PRICE | | | | | | SQUARE FOOTAGE |
| Jacksonville, FL | 10/12/22 | $ | 3,600 | | | | | | | 6,200 | |
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2022 Joint Venture Acquisitions
The following table details the joint venture acquisitions for the nine months ended September 30, 2022. These joint venture acquisitions are not consolidated for purposes of the Company's Condensed Consolidated Financial Statements.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Dollars in thousands | DATE ACQUIRED | PURCHASE PRICE | | | CASH
CONSIDERATION 1 | REAL
ESTATE | OTHER 2 | SQUARE FOOTAGE | COMPANY OWNERSHIP % |
San Francisco, CA 3 | 3/7/22 | $ | 67,175 | | | | $ | 66,789 | | $ | 65,179 | | $ | 1,610 | | 110,865 | | 50 | % |
Los Angeles, CA 4 | 3/7/22 | 33,800 | | | | 32,384 | | 32,390 | | (6) | | 103,259 | | 50 | % |
| Total joint venture acquisitions | | $ | 100,975 | | | | $ | 99,173 | | $ | 97,569 | | $ | 1,604 | | 214,124 | | |
1Cash consideration excludes prorations of revenue and expense due to/from seller at the time of the acquisition.
2Includes other assets acquired, liabilities assumed, and intangibles recognized at acquisition.
3Includes three properties.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
4Includes two properties.
Unconsolidated Joint Ventures
The Company's investment in and loss recognized for the three and nine months ended September 30, 2022 and 2021 related to its unconsolidated joint ventures accounted for under the equity method are shown in the table below:
| | | | | | | | | | | | | | | |
| THREE MONTHS ENDED
September 30, | NINE MONTHS ENDED
September 30, | |
| Dollars in thousands | 2022 | 2021 | 2022 | 2021 | |
| | | | | |
| Investments in unconsolidated joint ventures, beginning of period | $ | 210,781 | | $ | 117,935 | | $ | 161,942 | | $ | 73,137 | | |
New investments during the period 1 | 117,880 | | 4,593 | | 167,479 | | 49,612 | | |
| Equity loss recognized during the period | (124) | | (183) | | (776) | | (404) | | |
| | | | | |
| Owner distributions | (785) | | — | | (893) | | — | | |
Investments in unconsolidated joint ventures, end of period 1 | $ | 327,752 | | $ | 122,345 | | $ | 327,752 | | $ | 122,345 | | |
1Includes unconsolidated joint ventures acquired as part of the Merger, as well as investments in two joint ventures representing a 20% and 40% ownership interest in portfolios in Los Angeles, California and Dallas, Texas, respectively. Also, see 2022 Real Estate Asset Dispositions below for additional information.
2022 Real Estate Asset Dispositions
The following table details the Company's dispositions for the nine months ended September 30, 2022:
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| Dollars in thousands | DATE DISPOSED | SALE PRICE | CLOSING ADJUSTMENTS | NET PROCEEDS | NET REAL ESTATE INVESTMENT | OTHER (INCLUDING RECEIVABLES) 1 | GAIN/(IMPAIRMENT) | SQUARE FOOTAGE |
Loveland, CO 2 | 2/24/22 | $ | 84,950 | | $ | (45) | | $ | 84,905 | | $ | 40,095 | | $ | 4 | | $ | 44,806 | | 150,291 | |
San Antonio, TX 2 | 4/15/22 | 25,500 | | (2,272) | | 23,228 | | 14,381 | | 284 | | 8,563 | | 201,523 | |
GA, FL, PA 3, 8 | 7/29/22 | 133,100 | | (8,109) | | 124,991 | | 124,991 | | — | | — | | 316,739 | |
GA, FL, TX 5, 8 | 8/4/22 | 160,917 | | (5,893) | | 155,024 | | 151,819 | | 3,205 | | — | | 343,545 | |
Los Angeles, CA 3, 6, 8 | 8/5/22 | 134,845 | | (3,102) | | 131,743 | | 131,332 | | 411 | | — | | 283,780 | |
Dallas, TX 5, 7, 8 | 8/30/22 | 114,290 | | (682) | | 113,608 | | 113,608 | | — | | — | | 189,385 | |
Indianapolis, IN 4, 9 | 8/31/22 | 238,845 | | (5,846) | | 232,999 | | 84,767 | | 4,324 | | 143,908 | | 506,406 | |
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| Total dispositions | | $ | 892,447 | | $ | (25,949) | | $ | 866,498 | | $ | 660,993 | | $ | 8,228 | | $ | 197,277 | | 1,991,669 | |
1Includes straight-line rent receivables, leasing commissions and lease inducements.
2Includes two properties.
3Includes four properties.
4Includes five properties.
5Includes six properties.
6Values and square feet are represented at 100%. The Company retained a 20% ownership interest in the joint venture that purchased these properties.
7Values and square feet are represented at 100%. The Company retained a 40% ownership interest in the joint venture that purchased these properties.
8These properties were acquired as part of the Merger and were included as assets held for sale in the purchase price allocation.
9Two of the five properties included in this portfolio were acquired in the Merger and were included as assets held for sale in the purchase price allocation.
Subsequent to September 30, 2022, the Company disposed of the following properties:
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| Dollars in thousands | DATE DISPOSED | SALE PRICE | SQUARE FOOTAGE |
Dallas, TX 1, 2 | 10/4/22 | $ | 104,025 | | 291,328 | |
Houston, TX 2 | 10/21/22 | 32,000 | | 134,910 | |
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| Total dispositions | | $ | 136,025 | | 426,238 | |
1Includes two properties.
2These properties were classified as assets held for sale as of September 30, 2022.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Assets Held for Sale
The Company had six properties classified as assets held for sale as of September 30, 2022 and no properties classified as assets held for sale as of December 31, 2021. The table below reflects the assets and liabilities of the properties classified as held for sale as of September 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | |
| Dollars in thousands | | September 30, 2022 | | December 31, 2021 |
| Balance Sheet data: | | | | |
| Land | | $ | 10,594 | | | $ | — | |
| Building and improvements | | 199,821 | | | — | |
| Lease intangibles | | 11,389 | | | — | |
| Personal property | | 211 | | | — | |
| Financing lease right-of-use assets | | 307 | | | — | |
| | 222,322 | | | — | |
| Accumulated depreciation | | (47,051) | | | — | |
| Real estate assets held for sale, net | | 175,271 | | | — | |
| Operating lease right-of-use assets | | 1,193 | | | — | |
| Other assets, net | | 8,610 | | | 57 | |
| Assets held for sale, net | | $ | 185,074 | | | $ | 57 | |
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| Accounts payable and accrued liabilities | | $ | 3,768 | | | $ | 169 | |
| Operating lease liabilities | | $ | 864 | | | $ | — | |
| Financing lease liabilities | | $ | 2,427 | | | $ | — | |
| Other liabilities | | 3,585 | | | 125 | |
| Liabilities of assets held for sale | | $ | 10,644 | | | $ | 294 | |
Note 4. Leases
Lessor Accounting
The Company’s properties generally were leased pursuant to non-cancelable, fixed-term operating leases with expiration dates through 2040. Some leases provide for fixed rent renewal terms in addition to 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 and nine months ended September 30, 2022 was $298.9 million and $578.1 million, respectively. Lease income for the Company's operating leases recognized for the three and nine months ended September 30, 2021 was $131.7 million and $388.6 million, respectively.
On March 30, 2022, the Company executed a lease as a ground lessor for a 1.9 acre parcel of land in Texas previously recorded in land held for development. The lease is classified as a sales-type lease under Topic 842 as the present value of lease payments equals or exceeds substantially all of the fair value of the underlying asset. The land value of $1.8 million was reclassified from Land held for development to Other assets.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Future lease payments under the non-cancelable operating leases, excluding any reimbursements and the sale-type lease, as of September 30, 2022 were as follows:
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| Dollars in thousands | OPERATING | |
| 2022 | $ | 243,946 | | |
| 2023 | 937,733 | | |
| 2024 | 816,000 | | |
| 2025 | 702,251 | | |
| 2026 | 605,417 | | |
| 2027 and thereafter | 2,242,792 | | |
| $ | 5,548,139 | | |
Lessee Accounting
As of September 30, 2022, the Company was obligated, as the lessee, under operating lease agreements consisting primarily of the Company’s ground leases. As of September 30, 2022, the Company had 243 properties totaling 17.8 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 September 30, 2022. The amortization of the prepaid rent, included in the operating lease right-of-use asset, represented approximately $0.5 million and $0.1 million of the Company’s rental expense for the three months ended September 30, 2022 and 2021, respectively, and $0.8 million and $0.4 million for the nine months ended September 30, 2022 and 2021, respectively.
The Company’s future lease payments (primarily for its 168 non-prepaid ground leases) as of September 30, 2022 were as follows:
| | | | | | | | |
| Dollars in thousands | OPERATING | FINANCING |
| 2022 | $ | 3,665 | | $ | 503 | |
| 2023 | 15,606 | | 2,139 | |
| 2024 | 15,193 | | 2,182 | |
| 2025 | 14,715 | | 2,218 | |
| 2026 | 14,735 | | 2,255 | |
| 2027 and thereafter | 894,018 | | 398,092 | |
| Total undiscounted lease payments | 957,932 | | 407,389 | |
| Discount | (689,092) | | (335,011) | |
| Lease liabilities | $ | 268,840 | | $ | 72,378 | |
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
The following table provides details of the Company's total lease expense for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED
September 30, | NINE MONTHS ENDED
September 30, |
| Dollars in thousands | 2022 | 2021 | 2022 | 2021 |
| Operating lease cost | | | | |
| Operating lease expense | $ | 4,204 | | $ | 1,196 | | $ | 6,613 | | $ | 3,555 | |
| Variable lease expense | 1,061 | | 1,016 | | 3,123 | | 2,883 | |
| | | | |
| Finance lease cost | | | | |
| Amortization of right-of-use assets | 381 | | 90 | | 884 | | 267 | |
| Interest on lease liabilities | 861 | | 255 | | 1,913 | | 748 | |
| Total lease expense | $ | 6,507 | | $ | 2,557 | | $ | 12,533 | | $ | 7,453 | |
| | | | |
| Other information | | | | |
| Operating cash flows outflows related to operating leases | $ | 3,847 | $ | 1,424 | | $ | 8,443 | | $ | 5,855 | |
| Operating cash flows outflows related to financing leases | $ | 476 | $ | 151 | | $ | 1,262 | | $ | 678 | |
| Financing cash flows outflows related to financing leases | $ | 3 | $ | 6 | | $ | 3 | | $ | 162 | |
| Right-of-use assets obtained in exchange for new finance lease liabilities | $ | 9,874 | $ | 1,420 | | $ | 50,463 | | $ | 1,420 | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 198,261 | $ | 8,298 | | $ | 198,261 | | $ | 8,298 | |
| | | | |
| Weighted-average years remaining lease term (excluding renewal options) - operating leases | 50.2 | 47.8 | | |
| Weighted-average years remaining lease term (excluding renewal options) - finance leases | 60.1 | 63.2 | | |
| Weighted-average discount rate - operating leases | 5.7 | % | 5.6 | % | | |
| Weighted-average discount rate - finance leases | 5.0 | % | 5.4 | % | | |
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Note 5. Other Assets and Liabilities
Other Assets
Other assets consist primarily of intangible assets, prepaid assets, real estate notes receivable, straight-line rent receivables, accounts receivable, additional long-lived assets and interest rate swaps. Items included in "Other assets, net" on the Company's Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 are detailed in the table below:
| | | | | | | | | | | | | | |
| Dollars in thousands | | September 30, 2022 | | December 31, 2021 |
| Above-market intangible assets, net | | $ | 86,410 | | | $ | 4,966 | |
| Prepaid assets | | 85,053 | | | 58,618 | |
Real estate notes receivable, net 1 | | 79,036 | | | — | |
| Straight-line rent receivables | | 78,038 | | | 70,784 | |
| Accounts receivable, net | | 36,103 | | | 14,072 | |
| Additional long-lived assets, net | | 21,722 | | | 20,048 | |
| Interest rate swap assets | | 16,136 | | | — | |
| Ground lease modification, net | | 8,170 | | | 8,511 | |
| Other receivables, net | | 7,258 | | | — | |
| Debt issuance costs, net | | 6,504 | | | 1,813 | |
| Project costs | | 4,001 | | | 5,129 | |
| Net investment in lease | | 1,828 | | | — | |
| Customer relationship intangible assets, net | | 1,134 | | | 1,174 | |
| Other | | 6,842 | | | 558 | |
| | $ | 438,235 | | | $ | 185,673 | |
1 In October 2022, an additional amount of $15.0 million was funded for a real estate loan transaction.Accounts Payable and Accrued Liabilities
The following table provides details of the items included in "Accounts payable and accrued liabilities" on the Company's Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | |
| Dollars in thousands | | September 30, 2022 | | December 31, 2021 |
| Accrued property taxes | | $ | 86,192 | | | $ | 35,295 | |
| Accounts payable and capital expenditures | | 61,461 | | | 17,036 | |
| Accrued interest | | 24,959 | | | 12,060 | |
| Accrued income and franchise taxes | | 2,685 | | | 983 | |
| Retainage accrued on construction invoices | | 1,304 | | | 2,215 | |
| Other operating accruals | | 54,417 | | | 18,519 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | $ | 231,018 | | | $ | 86,108 | |
Other Liabilities
The following table provides details of the items included in "Other liabilities" on the Company's Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | |
| Dollars in thousands | | September 30, 2022 | | December 31, 2021 |
| Below-market intangible liabilities, net | | $ | 113,118 | | | $ | 4,931 | |
| Deferred revenue | | 60,675 | | | 45,130 | |
| Security deposits | | 28,299 | | | 11,116 | |
| Interest rate swap liability | | — | | | 5,917 | |
| Other | | 1,306 | | | 293 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | $ | 203,398 | | | $ | 67,387 | |
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Note 6. Notes and Bonds Payable
The table below details the Company’s notes and bonds payable as of September 30, 2022 and December 31, 2021.
| | | | | | | | | | | | | | |
| | MATURITY DATES 1 | BALANCE 2 AS OF | EFFECTIVE INTEREST RATE
as of 9/30/2022 |
| Dollars in thousands | 9/30/2022 | 12/31/2021 |
$1.5 billion Unsecured Credit Facility 3 | 10/27 | $ | 190,600 | | $ | — | | 3.99 | % |
$700 million Unsecured Credit Facility 3 | 5/23 | — | | 210,000 | | — | % |
$1.125 billion Asset Sale Term Loan 4 | 7/24 | 421,919 | | — | | 4.07 | % |
$350 million Unsecured Term Loan 3 | 7/25 | 348,735 | | — | | 4.10 | % |
$200 million Unsecured Term Loan 4 | 5/26 | 199,611 | | 199,460 | | 3.51 | % |
$300 million Unsecured Term Loan 4 5 | 10/26 | 299,930 | | — | | 2.47 | % |
$150 million Unsecured Term Loan 5 | 5/26 | 149,458 | | 149,376 | | 3.32 | % |
$200 million Unsecured Term Loan 4 5 | 7/27 | 199,328 | | — | | 2.27 | % |
$300 million Unsecured Term Loan 3 | 1/28 | 297,764 | | — | | 3.56 | % |
| Senior Notes due 2025 | 5/25 | 249,025 | | 249,040 | | 4.12 | % |
Senior Notes due 2026 4 | 8/26 | 569,786 | | — | | 4.94 | % |
Senior Notes due 2027 4 | 7/27 | 478,541 | | — | | 4.76 | % |
| Senior Notes due 2028 | 1/28 | 296,711 | | 296,612 | | 3.85 | % |
Senior Notes due 2030 4 | 2/30 | 562,974 | | — | | 5.30 | % |
| Senior Notes due 2030 | 3/30 | 296,787 | | 296,813 | | 2.72 | % |
Senior Notes due 2031 4 | 3/31 | 628,617 | | — | | 5.13 | % |
| Senior Notes due 2031 | 3/31 | 295,424 | | 295,374 | | 2.25 | % |
| Mortgage notes payable | 8/23-12/26 | 84,929 | | 104,650 | | 3.97 | % |
| | $ | 5,570,139 | | $ | 1,801,325 | | |
1Includes extension options.
2Balance is presented net of discounts and issuance costs and inclusive of premiums, where applicable.
3On July 20, 2022, the Company entered into an amended and restated credit facility which included a $1.5 billion revolving credit facility, replacing Legacy HR's $700 million credit facility.
4Debt instruments assumed as part of the Merger with Legacy HTA on July 20, 2022. Amounts shown represent fair value adjustments.
5The effective interest rate includes the impact of interest rate swaps on $675.0 million at a weighted average rate of 1.57% (plus the applicable margin rate, currently 105 basis points).
Changes in Debt Structure
Mortgage payoffs
On February 18, 2022, the Company repaid in full a mortgage note payable bearing interest at a rate of 4.70% that encumbered a 56,762 square foot property in California. The aggregate payoff price of $12.6 million consisted of outstanding principal of $11.0 million and a "make-whole" amount of approximately $1.6 million. The unamortized premium of $0.8 million and the unamortized cost on this note of $0.1 million were written off upon payoff.
On February 24, 2022, the Company repaid in full a mortgage note payable bearing interest at a rate of 6.17% that encumbered a 80,153 square foot property in Colorado, in conjunction with the disposition of the property. The aggregate payoff price of $6.4 million consisted of outstanding principal of $5.8 million and a "make-whole" amount of approximately $0.6 million. The unamortized premium of $0.1 million was written off upon payoff.
Exchange Offer
In connection with the Merger, the OP offered to exchange all validly tendered and accepted notes of each series previously issued by Legacy HR (the “Old HR Notes”) for (i) up to $250,000,000 of 3.875% Senior Notes due 2025 (the “2025 Notes”), (ii) up to $300,000,000 of 3.625% Senior Notes due 2028 (the “2028 Notes”), (iii) up to $300,000,000 of 2.400% Senior Notes due 2030 (the “2030 Notes”) and (iv) up to $300,000,000 of 2.050% Senior Notes due 2031 to be issued by the OP (the “2031 Notes” and, collectively, the “New HR Notes”) and solicited consents from holders of the Old HR Notes to amend the indenture governing the Old HR Notes to eliminate substantially all of the restrictive covenants in such indenture (the “Exchange Offers”). The New HR Notes were issued pursuant to an indenture dated July 22, 2022, among the OP, Legacy HTA and U.S. Bank Trust Company, National Association, as trustee, as
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
supplemented by the first supplemental indenture, dated as of July 22, 2022, the second supplemental indenture, dated as of July 22, 2022, the third supplemental indenture, dated as of July 22, 2022 and the fourth supplemental indenture, dated as of July 22, 2022. Legacy HTA guaranteed the New HR Notes pursuant to (i) a guarantee of the 2025 Notes, (ii) a guarantee of the 2028 Notes, (iii) a guarantee of the 2030 Notes, and (iv) a guarantee of the 2031 Notes, each dated July 22, 2022. Legacy HTA and the OP filed a registration statement on Form S-4 (File No. 333-265593) relating to the issuance of the New HR Notes with the Securities and Exchange Commission (the “SEC”) on June 14, 2022, which was declared effective by the SEC on June 28, 2022. The following sets forth the results of the Exchange Offers:
| | | | | | | | | | | |
| Series of Old HR Notes | Tenders and Consents Received as of the Expiration Date | Percentage of Total Outstanding Principal Amount of Such Series of Old HR Notes |
| 3.875 | % | Senior Notes due 2025 | $235,016,000 | 94.01 | % |
| 3.625 | % | Senior Notes due 2028 | $290,246,000 | 96.75 | % |
| 2.400 | % | Senior Notes due 2030 | $297,507,000 | 99.17 | % |
| 2.050 | % | Senior Notes due 2031 | $298,858,000 | 99.62 | % |
Senior Notes Assumed with the Merger
In connection with the Merger, the Company assumed senior notes ("Legacy Senior Notes") that were originated on various dates prior to the date of the Merger by the OP (formerly, Healthcare Trust of America Holdings, LP). These notes are all fully and unconditionally guaranteed by the Company and have semi-annual payment requirements. In addition, the Legacy Senior Notes carry customary restrictive financial covenants, including limitations on our ability to incur additional indebtedness and requirements to maintain a pool of unencumbered assets. In addition, the corresponding indentures provide for the ability to redeem the Legacy Senior Notes, subject to certain "make whole" call provisions. The Legacy Senior Notes assumed by the Company consist of the following:
| | | | | | | | | | | | | | |
| | COUPON | | PRINCIPAL OUTSTANDING AS OF |
| Dollars in thousands | FACE VALUE | 9/30/2022 | 12/31/2021 |
| Senior Notes due 2026 | 3.50% | $ | 600,000 | | $ | 600,000 | | $ | — | |
| Senior Notes due 2027 | 3.75% | 500,000 | | 500,000 | | — | |
| Senior Notes due 2030 | 3.10% | 650,000 | | 650,000 | | — | |
| Senior Notes due 2031 | 2.00% | 800,000 | | 800,000 | | — | |
| | $ | 2,550,000 | | $ | 2,550,000 | | $ | — | |
Credit Facilities
In connection with the effectiveness of the Merger, Legacy HR (in a limited capacity), Legacy HTA and the OP entered into the Fourth Amended and Restated Credit and Term Loan Agreement (the “Credit Facility”) with Wells Fargo Bank, National Association, as Administrative Agent; Wells Fargo Securities, LLC, JPMorgan Chase Bank, N.A., and Citibank, N.A., as Joint Book Runners; Wells Fargo Securities, LLC, JPMorgan Chase Bank, N.A., U.S. Bank National Association, Citibank, N.A., The Bank of Nova Scotia, Capital One, National Association, U.S. Bank National Association, and PNC Capital Markets LLC, as Joint Lead Arrangers; and the other lenders named therein. The Credit Facility restructured the parties’ existing bank facilities and added additional borrowing capacities for the Company following the Merger. The OP is the borrower under the Credit Facility (in such capacity, the “Borrower”).
•Legacy HR’s existing $700.0 million revolving credit facility under the Amended and Restated Credit Agreement, dated as of May 31, 2019 (as amended, restated, replaced, supplemented, or otherwise modified from time to time prior to July 20, 2022, the “Existing HR Revolving Credit Agreement”), by and among Legacy HR, the lenders party thereto from time to time and their assignees, as lenders, and Wells Fargo Bank, National Association, as the administrative agent (the “WF Administrative Agent”), was terminated, all outstanding obligations in respect thereof were deemed paid in full and all commitments thereunder were permanently reduced to zero and terminated.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
•Legacy HR’s existing $200.0 million term loan facility and existing $150.0 million term loan facility under the Amended and Restated Term Loan Agreement, dated as of May 31, 2019 (as amended, restated, replaced, supplemented, or otherwise modified from time to time prior to July 20, 2022, the “Existing HR Term Loan Agreement”), by and among Legacy HR, the lenders party thereto from time to time and their assignees, as lenders, and the WF Administrative Agent, in each, case, were deemed continued and assumed by the Borrower under the Credit Facility, and the Existing HR Term Loan Agreement was terminated.
◦The existing $200.0 million term loan facility was amended to: (a) conform to the terms of the Borrower’s other term loan facilities under the Credit Facility; (b) include two one-year extension options, resulting in a latest final maturity in May 2026; and (c) reprice to align with the pricing for the Borrower’s other term loan facilities under the Credit Facility; and
◦The existing $150.0 million term loan facility was amended to conform to the terms of the Borrower’s other term loan facilities under the Credit Facility, and the existing maturity in June 2026 remains unchanged under the Credit Facility.
•Legacy HTA’s and the OP’s existing $1.0 billion revolving credit facility was upsized to $1.5 billion (the “Revolver”) pursuant to the Credit Facility. The Revolver currently matures in October 2025, and the Credit Facility adds an additional one-year extension option for the Revolver, for a total of two one-year extension options.
•Legacy HTA’s and the OP’s existing $300.0 million term loan facility was deemed continued pursuant to the Credit Facility and was amended to conform to the terms of the Borrower’s other term loan facilities under the Credit Facility. The existing maturity in October 2025 remains unchanged under the Credit Facility.
•Legacy HTA’s and the OP’s existing $200.0 million term loan facility was deemed continued pursuant to the Credit Facility and was amended to (a) conform to the terms of the Borrower’s other term loan facilities under the Credit Facility; (b) extend the maturity from January 2024 to July 20, 2027; and (c) reprice to align with the pricing for the Borrower’s other term loan facilities under the Credit Facility.
•The Credit Facility provides for a new $350.0 million delayed-draw term loan facility that is available to be drawn for 12 months after July 20, 2022 and has an initial maturity date of July 20, 2023, with two one-year extension options. As of September 30, 2022, the $350.0 million Credit Facility was drawn in full. The terms of any delayed draw term loans funded thereunder conform to the terms of the Borrower’s other term loan facilities under the Credit Facility, and the pricing for such delayed draw term loans aligns with the pricing for the Borrower’s other term loan facilities under the Credit Facility.
•The Credit Facility provides for a new $300.0 million term loan facility that was funded on July 20, 2022 and has a maturity date of January 20, 2028, with no extension options. The terms of such term loan facility conform to the terms of the Borrower’s other term loan facilities under the Credit Facility, and the pricing for such term loan facility aligns with the pricing for the Borrower’s other term loan facilities under the Credit Facility.
Note 7. 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.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. 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 September 30, 2022, the Company had 15 outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
| | | | | | | | |
| EXPIRATION DATE | AMOUNT | WEIGHTED
AVERAGE RATE |
| December 16, 2022 | 75,000 | | 2.37 | % |
| January 31, 2023 | $ | 300,000 | | 1.42 | % |
January 15, 2024 1 | 200,000 | | 1.21 | % |
May 1, 2026 1 | 100,000 | | 2.15 | % |
| $ | 675,000 | | 1.57 | % |
1 Derivatives hedge one-month term SOFR.
Subsequent to September 30, 2022, the Company entered into two additional interest rate swaps totaling $250.0 million with multiple counterparties, with both expiring in 2027. The Company designated these interest rate swaps as cash flow hedges of interest rate risk in the fourth quarter of 2022.
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 September 30, 2022.
| | | | | | | | |
| BALANCE AT SEPTEMBER 30, 2022 |
| In thousands | BALANCE SHEET LOCATION | FAIR VALUE |
| Derivatives designated as hedging instruments | | |
| | |
| Interest rate swaps | Other assets | $ | 16,136 | |
| | |
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 and nine months ended September 30, 2022 and 2021 related to the Company's outstanding interest rate swaps.
| | | | | | | | | | | | | | | | | |
| GAIN RECOGNIZED IN
AOCI ON DERIVATIVE
three months ended September 30, | | LOSS RECLASSIFIED FROM
AOCI INTO INCOME
three months ended September 30, |
| In thousands | 2022 | 2021 | 2022 | 2021 |
| Interest rate swaps | $ | (6,083) | | $ | (36) | | Interest expense | $ | 614 | | $ | 982 | |
| Settled treasury hedges | — | | — | | Interest expense | 107 | | 107 | |
| Settled interest rate swaps | — | | — | | Interest expense | 42 | | 42 | |
| | $ | (6,083) | | $ | (36) | | Total interest expense | $ | 763 | | $ | 1,131 | |
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
| | | | | | | | | | | | | | | | | |
| GAIN RECOGNIZED IN
AOCI ON DERIVATIVE
nine months ended September 30, | | LOSS RECLASSIFIED FROM
AOCI INTO INCOME
nine months ended September 30, |
| In thousands | 2022 | 2021 | 2022 | 2021 |
| Interest rate swaps | $ | (12,905) | | $ | (2,079) | | Interest expense | $ | 2,226 | | $ | 2,894 | |
| Settled treasury hedges | — | | — | | Interest expense | 320 | | 320 | |
| Settled interest rate swaps | — | | — | | Interest expense | 126 | | 126 | |
| | $ | (12,905) | | $ | (2,079) | | Total interest expense | $ | 2,672 | | $ | 3,340 | |
The Company estimates that $4.8 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 $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 September 30, 2022, 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 $16.5 million. As of September 30, 2022, the Company has not posted any collateral related to these agreements and was not in breach of any agreement.
Note 8. 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
During the third quarter of 2022, the Company continued the redevelopment of a 217,114 square foot medical office building in Dallas, Texas. As of September 30, 2022, the Company had funded approximately $11.1 million in project costs. The building continues to operate with in-place leases during construction. The first new tenant lease of the redevelopment commenced in the first quarter of 2022.
During the third quarter of 2022, the Company continued the redevelopment of a medical office building in Tacoma, Washington. As of September 30, 2022, the Company had funded approximately $10.3 million in project costs. The redevelopment includes interior and exterior improvements to the existing building, plus the addition of 23,000 square feet. The Company expects the 23,000 square foot tenant lease for the expansion space to commence in the fourth quarter of 2022.
The Company continued the development of a medical office building in Nashville, Tennessee. The Company is constructing a new 106,194 square foot medical office building with the initial tenant lease expected to commence in the third quarter of 2023. As of September 30, 2022, the Company had funded approximately $15.3 million in project costs. The redevelopment includes the demolition of an existing 81,000 square foot medical office building. The Company recognized an impairment charge of $5.0 million related to the existing building in 2021.
The Company is financing the construction of a two building medical office complex in Orlando, Florida. The 156,566 square foot development is expected to be complete in the second quarter of 2024. As of September 30, 2022, the Company had funded approximately $10.6 million towards the project costs.
The Company, through a joint venture partnership, continued the development of a medical office building in Raleigh, North Carolina. This joint venture expects to construct a new 120,694 square foot medical office building that is projected to be complete in the fourth quarter of 2024. As of September 30, 2022, the joint venture had funded approximately $15.3 million towards the project costs.
The Company is redeveloping three medical office buildings totaling 259,290 square feet in Washington, DC. The Company has approved a leasing plan with a capital outlay that is expected to be completed in the second quarter of
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
2024. As of September 30, 2022, the Company had funded $2.0 million in project costs.
Note 9. Stockholders' Equity
Common Stock
The following table provides a reconciliation of the beginning and ending shares of common stock outstanding for the nine months ended September 30, 2022 and the twelve months ended December 31, 2021:
| | | | | | | | |
| NINE MONTHS ENDED SEPTEMBER 30, 2022 | TWELVE MONTHS ENDED DECEMBER 31, 2021 |
| Balance, beginning of period | 150,457,433 | | 139,487,375 | |
| Issuance of common stock | 229,615,152 | | 10,899,301 | |
| Non-vested share-based awards, net of withheld shares | 499,705 | | 70,757 | |
| Balance, end of period | 380,572,290 | | 150,457,433 | |
At-The-Market Equity Offering Program
The Company has equity distribution agreements with various sales agents with respect to the at-the-market (“ATM”) offering program of common stock with an aggregate sales amount of up to $750.0 million. As of September 30, 2022, $750.0 million remained available for issuance under our current ATM offering program.
Common Stock Dividends
During the nine months ended September 30, 2022, the Company declared and paid common stock dividends totaling $0.93 per share. On November 2, 2022, the Company declared a quarterly common stock dividend in the amount of $0.31 per share payable on November 30, 2022 to stockholders of record on November 15, 2022.
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.
During the three and nine months ended September 30, 2022, the Company did not enter into any forward sale agreements to sell shares of common stock through the Company's ATM offering program.
The following table sets forth the computation of basic and diluted earnings per common share for the three and nine months ended September 30, 2022 and 2021.
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
| Dollars in thousands, except per share data | 2022 | 2021 | 2022 | 2021 |
| Weighted average common shares outstanding | | | | |
| Weighted average common shares outstanding | 330,788,997 | | 145,594,127 | | 211,740,767 | | 143,305,737 | |
| Non-vested shares | (1,983,742) | | (1,776,508) | | (1,933,957) | | (1,784,544) | |
| Weighted average common shares outstanding - basic | 328,805,255 | | 143,817,619 | | 209,806,810 | | 141,521,193 | |
| | | | |
| Weighted average common shares outstanding - basic | 328,805,255 | | 143,817,619 | | 209,806,810 | | 141,521,193 | |
| Dilutive effect of forward equity shares | — | | — | | — | | 14,036 | |
| Dilutive effect of OP Units | 3,167,668 | | — | | 1,067,493 | | — | |
| Dilutive effect of employee stock purchase plan | 58,461 | | — | | 69,687 | | 78,200 | |
| Weighted average common shares outstanding - diluted | 332,031,384 | | 143,817,619 | | 210,943,990 | | 141,613,429 | |
| | | | |
| Net Income (loss) attributable to common stockholders | $ | 28,304 | | $ | (2,066) | | $ | 76,661 | | $ | 45,052 | |
| Dividends paid on nonvested share-based awards | (610) | | (537) | | (1,817) | | (1,617) | |
| Net income (loss) applicable to common stockholders- basic | $ | 27,694 | | $ | (2,603) | | $ | 74,844 | | $ | 43,435 | |
| Net income attributable to OP units | 312 | | — | | 312 | | — | |
| Net income (loss) applicable to common stockholders - diluted | $ | 28,006 | | $ | (2,603) | | $ | 75,156 | | $ | 43,435 | |
| | | | |
| | | | |
| | | | |
| Basic earnings per common share - net income | $ | 0.08 | | $ | (0.02) | | $ | 0.36 | | $ | 0.31 | |
| | | | |
| | | | |
| Diluted earnings per common share - net income | $ | 0.08 | | $ | (0.02) | | $ | 0.35 | | $ | 0.31 | |
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
The effect of non-vested stock awards totaling 911,594 shares, options under the Company's Employee Stock Purchase Plan (the "ESPP") to purchase the Company's stock totaling 63,383 shares, and the dilutive impact of forward-equity contracts outstanding for 14,734 shares of common stock for the three months ended September 30, 2021 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.
Incentive Plans
Restricted Common Shares
During the nine months ended September 30, 2022, the Company made the following stock awards:
•During the first quarter of 2022, the Company granted non-vested stock awards to its named executive officers and other members of senior management and employees with a grant date fair value of $13.0 million, which consisted of an aggregate of 415,184 non-vested shares with vesting periods ranging from three to eight years.
•During the second quarter of 2022, the Company granted non-vested stock awards to eight of its directors with a grant date fair value of $0.8 million, which consisted of an aggregate of 26,840 non-vested shares, with a one-year vesting period.
•During the third quarter of 2022, the Company granted non-vested stock awards to its 12 non-employee directors with a grant date fair value of $1.8 million, which consisted of an aggregate of 70,816 non-vested shares, with vesting periods ranging from one to three years. The Company also granted non-vested stock awards to an employee, which consisted of 1,036 non-vested shares as a discretionary grant.
A summary of the activity under the Company's share-based incentive plans for the three and nine months ended September 30, 2022 and 2021 is included in the table below.
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
| | 2022 | 2021 | 2022 | 2021 |
| Share-based awards, beginning of period | 1,941,709 | | 1,778,308 | | 1,562,028 | | 1,766,061 | |
| Granted | 71,852 | | — | | 513,876 | | 203,701 | |
| Vested | (7,434) | | — | | (68,481) | | (191,454) | |
| Forfeited | (4,130) | | (2,957) | | (5,426) | | (2,957) | |
| Share-based awards, end of period | 2,001,997 | | 1,775,351 | | 2,001,997 | | 1,775,351 | |
During the nine months ended September 30, 2022 and 2021, the Company withheld 8,745 and 51,972 shares of common stock, respectively, from participants to pay estimated withholding taxes related to shares that vested.
Restricted Stock Units
Prior to 2022, the Company granted long-term incentive awards, comprised of restricted stock, based on backward-looking performance measured at the end of the calendar year. The Company adopted a new incentive compensation structure effective January 2022, comprised of restricted stock and restricted stock units ("RSUs"). The RSUs are granted at the beginning of the year with three-year forward-looking performance targets.
On January 3, 2022, the Company granted RSUs to its named executive officers and certain other officers, with a grant date fair value of $9.7 million, which consisted of an aggregate 294,932 RSUs with a five-year vesting period.
Approximately 43% of the RSUs vest based on two market performance conditions. Relative and absolute total shareholder return ("TSR") awards containing these market performance conditions were valued using independent specialists. The Company utilized a Monte Carlo simulation to calculate the weighted average grant date fair values of $30.56 for the absolute TSR component and $41.30 for the relative TSR component for the January 2022 grant using the following assumptions:
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
| | | | | | | |
| | THREE MONTHS ENDED MARCH 31, |
| Volatility | | | 30.0 | % |
| Dividend assumption | | | Accrued |
| Expected term | | | 3 years |
| Risk-free rate | | | 1.02 | % |
| Stock price (per share) | | | $31.68 |
The remaining 57% of the restricted stock units vest upon certain operating performance conditions. With respect to the operating performance conditions of the January grant, the grant date fair value was $31.68 based on the Company's share price on the date of grant. The combined weighted average grant date fair value of the January restricted stock units was $33.04 per share.
The following is a summary of the RSU activity during the three and nine months ended September 30, 2022:
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
| | Restricted Stock Units | Weighted Average Grant Date Fair Value | Restricted Stock Units | Weighted Average Grant Date Fair Value |
| Non-vested, beginning of period | 294,932 | | — | | — | | — | |
| Granted | — | | — | | 294,932 | | $ | 33.04 | |
| Vested | — | | — | | — | | — | |
| Non-vested as of September 30, 2022 | 294,932 | | | 294,932 | | |
Employee Stock Purchase Plan
Legacy HR maintained an ESPP prior to the completion of the Merger. The outstanding options to purchase shares of the common stock of Legacy HR became options to purchase Class A Common Stock of the Company upon completion of the Merger. No new options will be granted under the ESPP. A summary of the activity under the ESPP for the three and nine months ended September 30, 2022 and 2021 is included in the table below.
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
| | 2022 | 2021 | 2022 | 2021 |
| Outstanding and exercisable, beginning of period | 405,534 | | 389,414 | | 348,514 | | 341,647 | |
| Granted | — | | — | | 255,960 | | 253,200 | |
| Exercised | (4,576) | | (5,323) | | (17,094) | | (24,300) | |
| Forfeited | (37,628) | | (18,961) | | (83,417) | | (60,995) | |
| Expired | — | | — | | (140,633) | | (144,422) | |
| Outstanding and exercisable, end of period | 363,330 | | 365,130 | | 363,330 | | 365,130 | |
Note 10. 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 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 that consider forward yield curves and discount rates.
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
The table below details the fair values and carrying values for notes and bonds payable and real estate notes receivable at September 30, 2022 and December 31, 2021.
| | | | | | | | | | | | | | |
| | September 30, 2022 | December 31, 2021 |
| Dollars in millions | CARRYING VALUE | FAIR VALUE | CARRYING VALUE | FAIR VALUE |
Notes and bonds payable 1 | $ | 5,570.1 | | $ | 5,321.0 | | $ | 1,801.3 | | $ | 1,797.4 | |
Real estate notes receivable 1 | $ | 79.0 | | $ | 79.0 | | $ | — | | $ | — | |
| | | | |
1Level 2 – model-derived valuations in which significant inputs and significant value drivers are observable in active markets.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Disclosure Regarding Forward-Looking Statements
This report and other materials the Company has filed or may file with the Securities and Exchange Commission (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, and include, but are not limited to, statements related to the anticipated timing, financing benefits and financial and operational impact of the Merger. These forward-looking statements are based on the Company's current plans, objectives, estimates, expectations and intentions and inherently involve significant risks and uncertainties. Actual results and the timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risks and uncertainties, which include, without limitation, risks and uncertainties associated with: diverting the attention the Company's management from ongoing business operations; failure to realize the expected benefits of the Merger; significant transaction costs and/or unknown or inestimable liabilities of the Merger; the risk that Legacy HR's and Legacy HTA’s respective businesses will not be integrated successfully or that such integration may be more difficult, time-consuming or costly than expected; 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; general adverse economic and local real estate conditions; the inability of significant tenants to continue paying their rent obligations due to bankruptcy, insolvency or a general downturn in their business; increases in interest rates; increases in operating expenses and real estate taxes; changes in the dividend policy for the Company’s common stock or its ability to pay dividends; impairment charges; pandemics or other health crises, such as COVID-19; 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 Legacy HR’s and Legacy HTA's Annual Reports on Form 10-K for the year ended December 31, 2021. 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, Legacy HR's and Legacy HTA's filings with the SEC, including this report and Item 1A. Risk Factors herein and Legacy HR's and Legacy HTA's Annual Report on Form 10-K for the year ended December 31, 2021.
Merger with Healthcare Trust of America
Completed Merger
On July 20, 2022, Legacy HR, Legacy HTA, the OP and Merger Sub completed the Merger in accordance with the terms of the Merger Agreement. Immediately following the Merger, Legacy HR converted to a Maryland limited liability company and changed its name to “HRTI, LLC” and Legacy HTA changed its name to “Healthcare Realty Trust Incorporated”. In addition, the equity interests of Legacy HR were contributed by Legacy HTA by means of a contribution and assignment agreement to the OP such that Legacy HR became a wholly-owned subsidiary of the OP. As a result, Legacy HR became a part of an umbrella partnership REIT (“UPREIT”) structure, which is intended to align the corporate structure of the combined company after giving effect to the Merger and the UPREIT reorganization and to provide a platform for the combined company to more efficiently acquire properties in a tax-deferred manner. The 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 (the “NYSE”) under the ticker symbol “HR”. For additional information on the Merger, see Notes 2 and 6 to the Condensed Consolidated Financial Statements.
Unless expressly stated otherwise, the discussion in this Item 2 refers to Legacy HR's financial condition and results of operations on a stand-alone basis prior to giving effect to the Merger. Because Legacy HR was the accounting acquirer under GAAP in the transaction, its historical financial statements became the historical financial
statements of the Company. For additional information, please refer to the Explanatory Note in this Quarterly Report on Form 10-Q.
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. After the refinancing of its bank facilities in connection with the Merger, as of September 30, 2022, the Company had $1.3 billion available to be drawn on its Credit Facility and $57.6 million in 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 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.
Financings in Connection with the Merger
In connection with the effectiveness of the Merger, Legacy HR (in a limited capacity), Legacy HTA and the OP entered into the Credit Facility, which restructures the parties’ existing bank facilities and adds additional borrowing capacities for the Company following the Merger.
Investing Activities
Cash flows provided by investing activities for the nine months ended September 30, 2022 were approximately $1.4 billion. Below is a summary of significant investing activities.
Acquisitions
The following table details the Company's acquisitions for the nine months ended September 30, 2022:
| | | | | | | | | | | | | | | | | |
| Dollars in thousands | ASSOCIATED HEALTH SYSTEM/TENANCY 1 | DATE ACQUIRED | PURCHASE PRICE | SQUARE FOOTAGE | MILES TO CAMPUS |
| Dallas, TX | Texas Health Resources | 2/11/22 | $ | 8,175 | | 18,000 | 0.19 |
San Francisco, CA 2 | Kaiser/Sutter Health | 3/7/22 | 114,000 | | 166,396 | | 0.90 to 3.30 |
| Q1 2022 subtotal | | | 122,175 | | 184,396 | | |
| Atlanta, GA | Wellstar Health | 4/7/22 | 6,912 | | 21,535 | | 0.00 |
| Denver, CO | Centura Health | 4/13/22 | 6,320 | | 12,207 | | 2.40 |
Colorado Springs, CO 3 | Centura Health | 4/13/22 | 13,680 | | 25,800 | | 0.80 to 1.70 |
| Seattle, WA | UW Medicine | 4/28/22 | 8,350 | | 13,256 | | 0.05 |
| Houston, TX | CommonSpirit | 4/28/22 | 36,250 | | 76,781 | | 1.70 |
| Los Angeles, CA | Cedars-Sinai Health Systems | 4/29/22 | 35,000 | | 34,282 | | 0.11 |
| Oklahoma City, OK | Mercy Health | 4/29/22 | 11,100 | | 34,944 | | 0.18 |
Raleigh, NC 2 | WakeMed/None | 5/31/22 | 27,500 | | 85,113 | | 0.25 to 12.30 |
Tampa, FL 3 | BayCare Health | 6/9/22 | 18,650 | | 55,788 | | 0.23 |
| Q2 2022 subtotal | | | 163,762 | | 359,706 | | |
| Seattle, WA | EvergreenHealth | 8/1/22 | 4,850 | | 10,593 | | 0.24 |
| Raleigh, NC | WakeMed | 8/9/22 | 3,783 | | 11,345 | | 0.24 |
| Jacksonville, FL | Ascension | 8/9/22 | 18,195 | | 34,133 | | 0.03 |
| Atlanta, GA | Wellstar | 8/10/22 | 11,800 | | 43,496 | | 0.11 |
| Denver, CO | Centura | 8/11/22 | 14,800 | | 34,785 | | 2.10 |
| Raleigh, NC | Duke | 8/18/22 | 11,375 | | 31,318 | | 0.19 |
| Nashville, TN | Ascension | 9/15/22 | 21,000 | | 61,932 | | 0.80 |
| Austin, TX | HCA | 9/29/22 | 5,450 | | 15,000 | | 0.03 |
| Q3 2022 subtotal | | | 91,253 | | 242,602 | | |
| Total real estate acquisitions | | $ | 377,190 | | 786,704 | | |
| | | | | |
1Includes buildings located on-campus, adjacent and off-campus that are anchored by healthcare systems or located within two miles of a hospital campus.
2Includes three properties.
3Includes two properties.
Subsequent to September 30, 2022, the Company acquired the following property:
| | | | | | | | | | | | | | | | | |
| Dollars in thousands | ASSOCIATED HEALTH SYSTEM/TENANCY 1 | DATE ACQUIRED | PURCHASE PRICE | SQUARE FOOTAGE | MILES TO CAMPUS |
| Jacksonville, FL | Ascension | 10/12/22 | $ | 3,600 | | 6,200 | 0.10 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | |
Joint Venture Acquisitions
The following table details the Joint Venture's acquisitions for the nine months ended September 30, 2022:
| | | | | | | | | | | | | | | | | | | | |
| Dollars in thousands | ASSOCIATED HEALTH SYSTEM/TENANCY 1 | DATE ACQUIRED | PURCHASE PRICE | SQUARE FOOTAGE | MILES TO CAMPUS | COMPANY OWNERSHIP % |
San Francisco, CA 2 | MarinHealth/Kaiser | 3/7/22 | $ | 67,175 | | 110,865 | 0.00 to 3.30 | 50 | % |
Los Angeles, CA 3 | Valley Presbyterian Health | 3/7/22 | 33,800 | | 103,259 | | 1.30 | 50 | % |
| | | | | | |
| | | | | | |
| Total joint venture acquisitions | | $ | 100,975 | | 214,124 | | | |
1Includes buildings located on-campus, adjacent and off-campus that are anchored by healthcare systems or located within two miles of a hospital campus.
2Includes three properties.
3Includes two properties.
Dispositions
The Company disposed of 30 properties during the nine months ended September 30, 2022 for a total sales price of $892.4 million, including cash proceeds of $866.5 million. The following table details these dispositions for the nine months ended September 30, 2022:
| | | | | | | | | | | | | | |
| Dollars in thousands | | Date Disposed | Sales Price | Square Footage |
Loveland, CO 1 | | 2/24/22 | $ | 84,950 | | 150,291 |
San Antonio, TX 1 | | 4/15/22 | 25,500 | | 201,523 |
GA, FL, PA 2 | | 7/29/22 | 133,100 | | 316,739 |
GA, FL, TX 4 | | 8/4/22 | 160,917 | | 343,545 |
Los Angeles, CA 2, 5 | | 8/5/22 | 134,845 | | 283,780 |
Dallas, TX 4, 6 | | 8/30/22 | 114,290 | | 189,385 |
Indianapolis, IN 3 | | 8/31/22 | 238,845 | | 506,406 |
| | | | |
| Total dispositions | | $ | 892,447 | | 1,991,669 | |
1Includes two properties.
2Includes four properties.
3Includes five properties.
4Includes six properties.
5Values and square feet are represented at 100%. The Company retained a 20% ownership interest in the joint venture that purchased these properties.
6Values and square feet are represented at 100%. The Company retained a 40% ownership interest in the joint venture that purchased these properties.
Subsequent to September 30, 2022, the Company disposed of the following properties:
| | | | | | | | | | | |
| Dollars in thousands | DATE DISPOSED | SALE PRICE | SQUARE FOOTAGE |
Dallas, TX 1, 2 | 10/4/22 | $ | 104,025 | | 291,328 | |
Houston, TX 2 | 10/21/22 | 32,000 | | 134,910 | |
| | | |
| | | |
| Total dispositions | | $ | 136,025 | | 426,238 | |
1 Includes two properties.
2 These properties were classified as assets held for sale as of September 30, 2022.
Capital Funding
During the nine months ended September 30, 2022, capital funding included the following:
•$48.6 million toward the following development and redevelopment of properties:
◦Memphis, Tennessee redevelopment totaled $3.0 million;
◦Dallas, Texas redevelopments totaled $3.6 million;
◦Tacoma, Washington redevelopment totaled $6.2 million;
◦Nashville, Tennessee development totaled $13.6 million;
◦Orlando, Florida development totaled $1.0 million;
◦Raleigh, North Carolina development totaled $5.9 million;
◦Miscellaneous other redevelopment totaled $13.7 million; and
◦tenant improvement funding for previously completed projects totaled $1.6 million.
•$26.0 million toward first generation tenant improvements and planned capital expenditures for acquisitions;
•$20.1 million toward second generation tenant improvements; and
•$23.2 million toward capital expenditures.
Financing Activities
Cash flows used in financing activities for the nine months ended September 30, 2022 were approximately $1.5 billion. See Notes 6 and 9 to the Condensed Consolidated Financial Statements accompanying this report for more information about capital markets and financing activities.
Common Stock Issuances
At-The-Market Equity Offering Program
The Company has equity distribution agreements with various sales agents with respect to our ATM offering program of common stock with an aggregate sales amount of up to $750.0 million. As of September 30, 2022, $750.0 million remained available for issuance under our current ATM offering program.
Debt Activity
On February 18, 2022, the Company repaid in full a mortgage note payable bearing interest at a rate of 4.70% that encumbered a 56,762 square foot property in California. The aggregate payoff price of $12.6 million consisted of outstanding principal of $11.0 million and a "make-whole" amount of approximately $1.6 million. The unamortized premium of $0.8 million and the unamortized cost on this note of $0.1 million were written off upon payoff.
On February 24, 2022, the Company repaid in full a mortgage note payable bearing interest at a rate of 6.17% that encumbered an 80,153 square foot property in Colorado, in conjunction with the disposition of the property. The aggregate payoff price of $6.4 million consisted of outstanding principal of $5.8 million and a "make-whole" amount of approximately $0.6 million. The unamortized premium of $0.1 million was written off upon payoff.
As of September 30, 2022, the Company had outstanding interest rate derivatives totaling $675.0 million to hedge one-month LIBOR/Term SOFR. The following details the amount and rate of each swap (dollars in thousands):
| | | | | | | | |
| EXPIRATION DATE | AMOUNT | WEIGHTED
AVERAGE RATE |
| January 31, 2023 | $ | 300,000 | | 1.42 | % |
| December 16, 2022 | 75,000 | | 2.37 | % |
January 15, 2024 1 | 200,000 | | 1.21 | % |
May 1, 2026 1 | 100,000 | | 2.15 | % |
| $ | 675,000 | | 1.57 | % |
1 Derivatives hedge one-month term SOFR.
Operating Activities
Cash flows provided by operating activities decreased from $170.3 million for the nine months ended September 30, 2021 to $126.7 million for the nine months ended September 30, 2022. 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. To the extent revenues related to the properties being sold exceed income from these new investments, the Company's results of operations and cash flows could be adversely affected.
New Accounting Pronouncements
See Note 1 to the Condensed Consolidated Financial Statements accompanying this report for information on new accounting standards.
Trends and Matters Impacting Operating Results
Management monitors factors and trends important to the Company and the REIT industry to gauge the potential impact on the operations of the Company. In addition to the matters discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, 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 477 leases totaling 1.3 million square feet that will expire during the fourth quarter of 2022. Approximately 79% of the leases expiring during the fourth quarter of 2022 are 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 nine months of the year was within this range.
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 September 30, 2022, leases for approximately 91% of the Company's multi-tenant leased square footage allow for some recovery of operating expenses, with approximately 32% having modified gross lease structures and approximately 59% having net lease structures.
General and Administrative Expense
The Company expects annual general and administrative expense synergies of $33 million to $36 million that will be realized within a year from the closing of the Merger.
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.
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 provision for bad debts, net; and subtracting maintenance capital expenditures, including second generation tenant improvements and leasing commissions paid and straight-line rent income, net of expense. The Company's definition of these terms may not be comparable to that of other real estate companies as they may have different methodologies for computing these amounts. 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.
The table below reconciles net income to FFO, Normalized FFO and FAD for the three and nine months ended September 30, 2022 and 2021.
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
| Amounts in thousands, except per share data | 2022 | 2021 | 2022 | 2021 |
| Net income (loss) attributable to common stockholders | $ | 28,304 | | $ | (2,066) | | $ | 76,661 | | $ | 45,052 | |
| Gain on sales of real estate properties | (143,908) | | (1,186) | | (197,188) | | (41,046) | |
| Impairment of real estate properties | — | | 10,669 | | (25) | | 16,581 | |
| Real estate depreciation and amortization | 159,643 | | 52,390 | | 272,634 | | 154,899 | |
| Non-controlling income from operating partnership units | 377 | | — | | 377 | | |
| Proportionate share of unconsolidated joint ventures | 3,526 | | 1,558 | | 8,702 | | 3,726 | |
| FFO attributable to common stockholders | $ | 47,942 | | $ | 61,365 | | $ | 161,161 | | $ | 179,212 | |
Acquisition and pursuit costs 1 | 482 | | 974 | | 3,137 | | 2,388 | |
Merger-related costs 2 | 79,402 | | — | | 92,603 | | — | |
| Lease intangible amortization | (2) | | 48 | | 891 | | (30) | |
Non-routine legal costs/forfeited earnest money received 3 | 346 | | — | | 577 | | (500) | |
| Debt financing costs | 1,091 | | — | | 2,520 | | 283 | |
Unconsolidated JV normalizing items 4 | 154 | | 54 | | 332 | | 136 | |
| Normalized FFO attributable to common stockholders | $ | 129,415 | | $ | 62,441 | | $ | 261,221 | | $ | 181,489 | |
| Non-real estate depreciation and amortization | 577 | | 586 | | 1,593 | | 1,900 | |
Non-cash interest amortization 5 | 8,924 | | 720 | | 10,382 | | 2,511 | |
| Provision for bad debt, net | 457 | | 25 | | 616 | | 3 | |
| Straight-line rent, net | (7,715) | | (1,171) | | (10,251) | | (3,459) | |
| Stock-based compensation | 3,666 | | 2,538 | | 10,721 | | 8,183 | |
Unconsolidated JV non-cash items 6 | (377) | | (341) | | (890) | | (1,051) | |
| Normalized FFO adjusted for non-cash items | $ | 134,947 | | $ | 64,798 | | $ | 273,392 | | $ | 189,576 | |
| 2nd generation TI | (10,147) | | (6,219) | | (20,097) | | (16,156) | |
| Leasing commissions paid | (8,283) | | (4,531) | | (15,525) | | (9,528) | |
| Capital additions | (16,067) | | (5,443) | | (23,244) | | (13,539) | |
| FAD | $ | 100,450 | | $ | 48,605 | | $ | 214,526 | | $ | 150,353 | |
| FFO per common share - diluted | $ | 0.14 | | $ | 0.42 | | $ | 0.76 | | $ | 1.26 | |
| Normalized FFO per common share - diluted | $ | 0.39 | | $ | 0.43 | | $ | 1.23 | | $ | 1.27 | |
FFO weighted average common shares outstanding - diluted 7 | 332,819 | | 144,807 | | 211,746 | | 142,488 | |
1Acquisition and pursuit costs include third-party and travel costs related to the pursuit of acquisitions and developments.
2Includes costs incurred related to the Merger.
3Non-routine legal costs include expenses related to two separate disputes; one with a contractor on a $60.6 million completed construction project and another with a tenant on a violation of use restrictions. Forfeited earnest money received related to a disposition that did not materialize.
4Includes the Company's proportionate share of acquisition and pursuit costs related to unconsolidated joint ventures.
5Includes the amortization of deferred financing costs, discounts and premiums, and non-cash financing receivable amortization.
6Includes the Company's proportionate share of straight-line rent, net related to unconsolidated joint ventures.
7The Company utilizes the treasury stock method which includes the dilutive effect of nonvested share-based awards outstanding of 787,559 and 802,150, respectively, for the three and nine months ended September 30, 2022.
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 and property lease guaranty income 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, properties undergoing redevelopment, and newly redeveloped or developed properties. Legacy HTA properties that met the same store criteria are included in both periods shown, on a proforma basis, as if they were owned by the Company for the full analysis period.
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. These properties are described in additional detail in Note 6 to the Condensed Consolidated Financial Statements included elsewhere in this report.
Any recently acquired property will be included in the same store pool once the Company has owned the property for eight full quarters. Newly developed or redeveloped properties will be included in the same store pool eight full quarters after substantial completion.
The following table reflects the Company's proforma same store cash NOI for the three months ended September 30, 2022 and 2021.
| | | | | | | | | | | | | | |
| NUMBER OF PROPERTIES | GROSS INVESTMENT
at September 30, 2022 | SAME STORE CASH NOI for the three months ended September 30, |
| Dollars in thousands | 2022 | 2021 |
| Same store properties | 589 | | $ | 7,943,839 | | $ | 178,828 | | $ | 173,951 | |
| | | | |
| | | | |
The following tables reconcile net income to proforma same store NOI and the same store property metrics to the total owned real estate portfolio for the three months ended September 30, 2022 and 2021:
Reconciliation of Proforma Same Store Cash NOI
| | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, |
| Dollars in thousands | 2022 | 2021 |
| Net income | $ | 28,304 | | $ | (2,066) | |
| | |
| | |
| Non-controlling interests | 312 | | — | |
| Other income (expense) | (89,477) | | 23,000 | |
| General and administrative expense | 16,741 | | 8,207 | |
| Depreciation and amortization expense | 158,117 | | 50,999 | |
Other expenses 1 | 82,659 | | 3,193 | |
| Straight-line rent revenue, net | (7,715) | | (1,170) | |
| Joint venture properties | 3,922 | | 1,210 | |
Other revenue 2 | (5,242) | | (2,043) | |
| Cash NOI | 187,621 | | 81,330 | |
| Pre-Merger Legacy HTA NOI | 27,769 | | 125,609 | |
| Proforma cash NOI | 215,390 | | 206,939 | |
| Cash NOI not included in same store | (36,562) | | (32,988) | |
| Proforma same store cash NOI | $ | 178,828 | | $ | 173,951 | |
1Includes acquisition and pursuit costs, Merger-related costs, bad debt, above and below market ground lease intangible amortization, leasing commission amortization and ground lease straight-line rent expense.
2Includes management fee income, interest, above and below market lease intangible amortization, lease inducement amortization, lease terminations and tenant improvement overage amortization.
Reconciliation of Proforma Same Store Properties
| | | | | | | | | | | | | | |
| AS OF SEPTEMBER 30, 2022 |
| Dollars and square feet in thousands | PROPERTY COUNT | GROSS INVESTMENT 1 | SQUARE
FEET | OCCUPANCY |
| Same store properties | 589 | | $ | 7,943,839 | | 34,731 | | 89.1 | % |
| Acquisitions | 85 | | 426,519 | | 4,235 | | 89.3 | % |
| Development completions | 6 | | 166,775 | | 410 | | 86.8 | % |
| Redevelopments | 11 | | 168,154 | | 1,067 | | 58.4 | % |
| Planned Dispositions | 4 | | 69,449 | | 223 | | 2.4 | % |
| Total owned real estate properties | 695 | | $ | 8,774,736 | | 40,666 | | 87.8 | % |
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 September 30, 2022 Compared to Three Months Ended September 30, 2021
The Company’s results of operations for the three months ended September 30, 2022 compared to the same period in 2021 were impacted by the Merger, acquisitions, developments, dispositions, gains on sale, and capital markets transactions.
Revenues
Rental income increased $167.2 million, or 126.9%, for the three months ended September 30, 2022 compared to the prior year period. This increase is comprised of the following:
•Acquisitions in 2021 and 2022 contributed $13.5 million.
•Leasing activity, including contractual rent increases, contributed $4.1 million.
•Dispositions in 2021 and 2022 resulted in a decrease of $5.0 million.
•Impact from the Merger contributed $154.6 million.
Interest income increased $1.4 million, or 75.6%, from the prior year period as a result of interest from notes receivables assumed in the Merger.
Other operating income increased $1.1 million, or 36.6%, from the prior year period primarily as a result of variable parking and asset management fees.
Expenses
Property operating expenses increased $57.0 million, or 102.6%, for the three months ended September 30, 2022 compared to the prior year period primarily as a result of the following activity:
•Acquisitions in 2021 and 2022 resulted in an increase of $5.3 million.
•Increases in portfolio operating expenses as follows:
◦Utilities expense of $1.3 million;
◦Maintenance and repair of $1.0 million;
◦Administrative, leasing commissions, and other legal expense of $0.6 million;
◦Janitorial expense of $0.2 million;
◦Compensation expense of $0.1 million; and
◦Insurance expense of $0.1 million.
•Property taxes decreased $0.4 million.
•Dispositions in 2021 and 2022 resulted in a decrease of $2.5 million.
•Impact from the Merger resulted in an increase of $51.3 million.
General and administrative expenses increased approximately $8.5 million, or 104.0%, for the three months ended September 30, 2022 compared to the prior year period primarily as a result of the following activity:
•Compensation expense increases of $1.4 million, including $1.0 million of non-cash expense.
•Net increases, including professional fees, audit services, insurance and other administrative costs, of $1.5 million.
•Impact from the Merger resulted in an increase of $5.6 million.
Merger-related costs totaled $79.4 million for the three months ended September 30, 2022. These costs, consisting primarily of legal, consulting, and banking services, were incurred in connection with the Merger with HTA.
Depreciation and amortization expense increased $107.1 million, or 210.0%, for the three months ended September 30, 2022 compared to the prior year period primarily as a result of the following activity:
•Acquisitions in 2021 and 2022 resulted in an increase of $6.9 million.
•Various building and tenant improvement expenditures resulted in an increase of $2.5 million.
•Dispositions in 2021 and 2022 resulted in a decrease of $2.2 million.
•Assets that became fully depreciated resulted in a decrease of $2.8 million.
•Impact from the Merger resulted in an increase of $102.7 million.
Other Income (Expense)
Gains on sale of real estate properties
In the third quarter of 2022, the Company recognized gains of approximately $143.9 million.
In the third quarter of 2021, the Company recognized gains of approximately $1.2 million.
Interest expense
Interest expense increased $39.7 million, or 297.8%, for the three months ended September 30, 2022 compared to the prior year period. The components of interest expense are as follows:
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | CHANGE |
| Dollars in thousands | 2022 | 2021 | $ | % |
| Contractual interest | $ | 42,019 | | $ | 12,201 | | $ | 29,818 | | 244.4 | % |
| Net discount/premium accretion | 7,617 | | 50 | | 7,567 | | 15,134.0 | % |
| Deferred financing costs amortization | 1,341 | | 713 | | 628 | | 88.1 | % |
| Interest rate swap amortization | 42 | | 42 | | — | | — | % |
| Treasury hedge amortization | 107 | | 107 | | — | | — | % |
| Fair value derivative | 1,732 | | — | | 1,732 | | — | % |
| Interest cost capitalization | (703) | | (34) | | (669) | | 1,967.6 | % |
| Right-of-use assets financing amortization | 889 | | 255 | | 634 | | 248.6 | % |
| Total interest expense | $ | 53,044 | | $ | 13,334 | | $ | 39,710 | | 297.8 | % |
Contractual interest expense increased $29.8 million, or 244.4%, for the three months ended September 30, 2022 compared to the prior year period primarily as a result of the following activity:
•Senior notes and unsecured term loans assumed in the Merger accounted for an increase of approximately $22.8 million.
•New unsecured term loans executed with the amended credit facility accounted for an increase of approximately $2.2 million.
•The Company's Unsecured Term Loan due 2024 and 2026, net of swaps, accounted for an increase of approximately $1.0 million.
•The Credit Facility accounted for an increase of approximately $4.2 million due to an increased weighted average balance outstanding and an increase in the weighted average interest rate.
•Mortgage note repayments, net of assumptions, accounted for a decrease of approximately $0.3 million.
Impairment of Real Estate Properties
In the third quarter of 2021, the Company recognized an impairment of approximately $10.7 million based on the contractual sales price of a property that was reclassified to held for sale during the third quarter of 2021.
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 3 to the Condensed Consolidated Financial Statements accompanying this report for more details regarding the Company's unconsolidated joint ventures.
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
The Company’s results of operations for the nine months ended September 30, 2022 compared to the same period in 2021 were impacted by the Merger, acquisitions, developments, dispositions, gains on sale, and capital markets transactions.
Revenues
Rental income increased $189.4 million, or 48.7%, for the nine months ended September 30, 2022 compared to the prior year period. This increase is comprised of the following:
•Acquisitions in 2021 and 2022 contributed $37.6 million.
•Leasing activity, including contractual rent increases, contributed $11.4 million.
•Dispositions in 2021 and 2022 resulted in a decrease of $14.2 million.
•Impact from the Merger contributed $154.6 million.
Interest income increased $4.8 million, or 199.0%, from the prior year period as the result of two financing receivables acquired during 2021 contributing $3.4 million and interest totaling $1.4 million from notes receivables assumed in the Merger.
Other operating income increased $1.9 million, or 26.2%, from the prior year period primarily as a result of variable parking and asset management fees.
Expenses
Property operating expenses increased $67.7 million, or 42.5%, for the nine months ended September 30, 2022 compared to the prior year period primarily as a result of the following activity:
•Acquisitions in 2021 and 2022 resulted in an increase of $15.1 million.
•Increases in portfolio operating expenses as follows:
◦Utilities expense of $3.2 million;
◦Administrative, leasing commissions, and other legal expense of $2.1 million;
◦Janitorial expense of $0.8 million;
◦Property tax expense increase of $0.6 million;
◦Compensation expense of $0.6 million;
◦Maintenance and repair expense of $1.1 million;
◦Security expense of $0.3 million; and
◦Insurance expense of $0.2 million.
•Dispositions in 2021 and 2022 resulted in a decrease of $7.6 million.
•Impact from the Merger resulted in an increase of $51.3 million.
General and administrative expenses increased approximately $13.1 million, or 51.7%, for the nine months ended September 30, 2022 compared to the prior year period primarily as a result of the following activity:
•Incentive-based awards increases of $1.5 million.
•Compensation expense increases of $4.0 million, including $2.4 million of non-cash expense.
•Net increases, including professional fees, audit services, insurance and other administrative costs, of $2.0 million.
•Impact from the Merger resulted in an increase of $5.6 million.
Merger-related costs totaled $92.6 million for the nine months ended September 30, 2022. These costs consisted primarily of legal, consulting, and banking services incurred in connection with the Merger with HTA.
Depreciation and amortization expense increased $117.0 million, or 77.5%, for the nine months ended September 30, 2022 compared to the prior year period primarily as a result of the following activity:
•Acquisitions in 2021 and 2022 resulted in an increase of $19.6 million.
•Various building and tenant improvement expenditures resulted in an increase of $7.6 million.
•Dispositions in 2021 and 2022 resulted in a decrease of $5.3 million.
•Assets that became fully depreciated resulted in a decrease of $7.6 million.
•Impact from the Merger including a reset for fair value resulted in an increase of $102.7 million.
Other Income (Expense)
Gains on sale of real estate properties
Gains on the sale of real estate properties in 2022 totaling approximately $197.2 million.
Gains on the sale of real estate properties in 2021 totaling approximately $41.0 million.
Interest expense
Interest expense increased $42.4 million, or 106.4%, for the nine months ended September 30, 2022 compared to the prior year period. The components of interest expense are as follows:
| | | | | | | | | | | | | | |
| NINE MONTHS ENDED SEPTEMBER 30, | CHANGE |
| Dollars in thousands | 2022 | 2021 | $ | % |
| Contractual interest | $ | 68,470 | | $ | 36,590 | | $ | 31,880 | | 87.1 | % |
| Net discount/premium accretion | 7,747 | | 146 | | 7,601 | | 5,206.2 | % |
| Deferred financing costs amortization | 2,760 | | 2,114 | | 646 | | 30.6 | % |
| Interest rate swap amortization | 126 | | 126 | | — | | — | % |
| Treasury hedge amortization | 320 | | 320 | | — | | — | % |
| Fair value derivative | 1,732 | | — | | 1,732 | | — | % |
| Interest cost capitalization | (848) | | (187) | | (661) | | 353.5 | % |
| Right-of-use assets financing amortization | 1,941 | | 748 | | 1,193 | | 159.5 | % |
| Total interest expense | $ | 82,248 | | $ | 39,857 | | $ | 42,391 | | 106.4 | % |
Contractual interest expense increased $31.9 million, or 87.1%, for the nine months ended September 30, 2022 compared to the prior year period primarily as a result of the following activity:
•Senior notes and unsecured term loans assumed with the Merger accounted for an increase of approximately $22.8 million.
•New unsecured term loans executed with the amended credit facility accounted for an increase of approximately $2.2 million.
•The Company's Unsecured Term Loan due 2024 and 2026, net of swaps, accounted for an increase of approximately $0.9 million.
•The Unsecured Credit Facility accounted for an increase of approximately $7.0 million due to an increased weighted average balance outstanding and an increase in the weighted average interest rate.
•Mortgage note repayments, net of assumptions, accounted for a decrease of approximately $1.0 million.
Impairment of Real Estate Properties
Impairment of real estate properties in 2021 totaling approximately $16.6 million was associated with the disposal of one property totaling $0.8 million and the reclassification of a property to held for sale resulting in an impairment of $10.7 million based on the contractual sales price. In addition, the Company recorded impairment charges totaling $5.1 million which includes a property associated with a redevelopment project in Nashville, Tennessee.
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 3 to the Condensed Consolidated Financial Statements accompanying this report for more details regarding the Company's unconsolidated joint ventures.