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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2022
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period
from
to
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Commission File Number: 001-35568
HEALTHCARE REALTY TRUST INCORPORATED
(Exact name of Registrant as specified in its charter)
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Maryland |
20-4738467 |
(State or other jurisdiction of
Incorporation or organization) |
(I.R.S. Employer
Identification No.) |
3310 West End Avenue
Suite 700
Nashville, Tennessee 37203
(Address of principal executive offices)
(615) 269-8175
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the
Act:
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Title of Each Class |
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Trading Symbol |
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Name of Each Exchange on Which Registered |
Class A Common Stock, $0.01 par value per share |
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HR |
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New York Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the
Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ☐ No ☒
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). Yes
☒ No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and "emerging growth company" in Rule
12b-2 of the Exchange Act.:
Large accelerated filer
☒ Accelerated filer
☐
Non-accelerated filer
☐ Smaller reporting company
☐
Emerging
growth company ☐
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for
complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant has filed a report on
and attestation to management's assessment of the effectiveness of
its internal control over financial reporting under Section 404(b)
of the Sarbanes-Oxley Act (15- U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report.
☒
If securities are registered pursuant to Section 12(b) of the Act,
indicate by check mark whether the financial statements of the
registrant included in the filing reflect the correction of an
error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are
restatements that required a recovery analysis of incentive-based
compensation received by any of the Registrant’s executive officers
during the relevant recovery period pursuant to §240.10D-1(b).
☐
Indicate by check mark whether the Registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act.)
Yes ☐ No ☒
The aggregate market value of the shares of common stock of the
Registrant (based upon the closing price of these shares on the New
York Stock Exchange on June 30, 2022 held by non-affiliates on
June 30, 2022 was $6,374,706,546.
As of February 24, 2023, there were 380,779,861 shares of the
Registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement relating to
the Annual Meeting of Stockholders to be held on June 5, 2023
are incorporated by reference into Part III of this
Report.
Explanatory Note
On July 20, 2022, pursuant to that certain 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”).
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 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. The consolidated 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 accounting purposes, the Merger was treated as a “reverse
acquisition” in which Legacy HR was considered the accounting
acquirer. As a result, the historical financial statements of the
accounting acquirer, Legacy HR, became the historical financial
statements of the Company, as defined below. For the full year of
2022, the Company's financial statements reflect the financial
position and results of operations of Legacy HR prior to July 20,
2022 and the consolidated company after giving effect to the Merger
from July 20, 2022 through December 31, 2022. The Merger was
accounted for using the acquisition method of accounting in
accordance with ASC 805, Business Combinations (“ASC 805”), which
requires, among other things, the assets acquired and the
liabilities assumed to be recognized at their acquisition date fair
value.
For purposes of this Annual Report on Form 10-K, references to the
"Company", "we", "us", and "our" 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.
In addition, the OP has issued unsecured notes described in Note 10
to the Company's Consolidated Financial Statements included in this
report. All unsecured notes are fully and unconditionally
guaranteed by the Company, and the OP is 98.9% owned by the
Company. Effective January 4, 2021, the SEC adopted amendments to
the financial disclosure requirements which permit subsidiary
issuers of obligations guaranteed by the parent to omit separate
financial statements if the consolidated financial statements of
the parent company have been filed, the subsidiary obligor is a
consolidated subsidiary of the parent company, the guaranteed
security is debt or debt-like, and the security is guaranteed fully
and unconditionally by the parent. Accordingly, separate
consolidated financial statements of the OP have not been
presented.
HEALTHCARE REALTY TRUST INCORPORATED
FORM 10-K
December 31, 2022
Table of Contents
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[Reserved] |
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Other Information |
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Disclosure Regarding Foreign Jurisdictions that Prevent
Inspections |
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PART I
Item 1. Business
The Company is a self-managed and self-administered real estate
investment trust (“REIT”) that owns, leases, manages, acquires,
finances, develops and redevelops income-producing real estate
properties associated primarily with the delivery of outpatient
healthcare services throughout the United States.
The Company operates so as to qualify as a REIT for federal income
tax purposes. As a REIT, the Company is not subject to corporate
federal income tax with respect to taxable income distributed to
its stockholders. See “Item 1A. Risk Factors” for a discussion of
risks associated with qualifying as a REIT.
As described in the Explanatory Note above and elsewhere in this
report, on July 20, 2022, Legacy HR and Legacy HTA completed a
merger between the companies in which Legacy HR merged with and
into a wholly-owned subsidiary of Legacy HTA, with Legacy HR
continuing as the surviving entity and a wholly-owned subsidiary of
Legacy HTA. Immediately following the Merger, Legacy HTA changed
its name to “Healthcare Realty Trust Incorporated.” For accounting
purposes, the Merger was treated as a “reverse acquisition” in
which Legacy HR was considered the acquirer. The consolidated
company operates under the name “Healthcare Realty Trust
Incorporated” and its shares of class A common stock, $0.01 par
value per share, trade under the ticker symbol “HR”.
Real Estate Properties
The Company had gross investments of approximately $14.1 billion in
688 real estate properties, construction in progress,
redevelopments, financing receivables, financing lease right-of-use
assets, land held for development and corporate property as of
December 31, 2022. In addition, the Company had a weighted
average ownership interest of approximately 48% in 33 real estate
properties held in joint ventures as of December 31, 2022. The
Company provided leasing and property management services to 93% of
its portfolio nationwide as of December 31, 2022. The
Company’s real estate property investments by geographic area are
detailed in Note 3 to the Consolidated Financial Statements. The
following table details the Company's owned properties by facility
type as of December 31, 2022:
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December 31, 2022 |
Dollars and square feet in thousands |
GROSS INVESTMENT |
SQUARE FEET |
NUMBER OF PROPERTIES |
OCCUPANCY
1
|
Medical office/outpatient |
$ |
12,570,933 |
|
36,800 |
|
656 |
|
87.2 |
% |
Inpatient |
653,648 |
|
1,528 |
|
20 |
|
91.2 |
% |
Office |
508,741 |
|
1,789 |
|
10 |
|
96.2 |
% |
|
13,733,322 |
|
40,117 |
|
686 |
|
87.7 |
% |
Construction in progress |
35,560 |
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|
Land held for development |
74,265 |
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|
Investments in financing receivables, net
2,3
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120,236 |
|
187 |
|
1 |
|
100.0 |
% |
Financing lease right-of-use assets
3
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83,824 |
|
45 |
|
1 |
|
77.8 |
% |
Corporate property |
10,418 |
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Total real estate investments |
14,057,625 |
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40,349 |
|
688 |
|
87.8 |
% |
Unconsolidated joint ventures
4
|
350,305 |
|
1,913 |
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33 |
|
85.4 |
% |
Total investments |
$ |
14,407,930 |
|
42,262 |
|
721 |
|
87.7 |
% |
1The
occupancy column represents the percentage of total rentable square
feet leased (including month-to-month and holdover leases). There
was one property excluded from the table above that was classified
as held for sale as of December 31, 2022.
2Investments
in financing receivables, net includes a single-tenant net lease
property in San Diego, CA in a sale-leaseback transaction totaling
$112.9 million.
3Financing
lease right-of-use assets includes a multi-tenant lease property in
Columbus, OH in a sale-leaseback transaction totaling $16.1
million, of which $8.7 million was accounted for as an imputed
lease arrangement as required under ASC 842, Leases. The remaining
$7.4 million was accounted for as a financing arrangement and is
included in Investments in financing receivables, net and includes
its relative portion of the square feet and occupancy.
4Gross
investment includes the Company's pro rata share of unconsolidated
joint ventures, net of mortgage note payable. Square feet has not
been adjusted by the Company's ownership percentage.
Financial Concentrations
The Company’s real estate portfolio is leased to a diverse tenant
base. For the year ended December 31, 2022, the Company did
not have any tenants that accounted for 10% or more of the
Company’s consolidated revenues. See Note 3 to the Consolidated
Financial Statements for additional information regarding the
Company's gross investments by geographic market.
Expiring Leases
As of December 31, 2022, the weighted average remaining years
to expiration pursuant to the Company’s leases was approximately
4.5 years, with expirations through 2052. The table below details
the Company’s lease expirations as of December 31, 2022,
excluding the Company's unconsolidated joint ventures, financing
receivables and right-of-use assets.
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EXPIRATION YEAR |
NUMBER OF LEASES |
LEASED
SQUARE FEET |
PERCENTAGE
OF LEASED
SQUARE FEET |
2023
(1)
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1,459 |
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5,004,436 |
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14.2 |
% |
2024 |
1,171 |
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5,150,146 |
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14.6 |
% |
2025 |
1,020 |
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4,442,560 |
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12.6 |
% |
2026 |
814 |
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3,610,265 |
|
10.2 |
% |
2027 |
807 |
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4,420,368 |
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12.5 |
% |
2028 |
440 |
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2,547,615 |
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7.2 |
% |
2029 |
381 |
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2,484,979 |
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7.1 |
% |
2030 |
288 |
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2,206,923 |
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6.3 |
% |
2031 |
227 |
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1,203,587 |
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3.5 |
% |
2032 |
267 |
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2,106,365 |
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6.0 |
% |
Thereafter |
184 |
|
2,053,288 |
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5.8 |
% |
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7,058 |
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35,230,532 |
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100.0 |
% |
1Includes
177 leases totaling 311,889 square feet that expired prior to
December 31, 2022 and were on month-to-month
terms.
See "Trends and Matters Impacting Operating Results" as part of
Management's Discussion and Analysis of Financial Condition and
Results of Operations included in Part II, Item 7 of this report
for additional information regarding the Company's leases and
leasing efforts.
Liquidity
The Company believes that its liquidity and sources of capital are
adequate to satisfy its cash requirements. The Company expects to
meet its liquidity needs through cash on hand, cash flows from
operations, property dispositions, equity and debt issuances in the
public or private markets and borrowings under commercial credit
facilities.
Business Strategy
The Company owns and operates properties that facilitate the
delivery of healthcare services in primarily outpatient settings.
To execute its strategy, the Company engages in a broad spectrum of
integrated services including leasing, management, acquisition,
financing, development and redevelopment of such properties. The
Company seeks to generate stable, growing income and lower the
long-term risk profile of its portfolio of properties by focusing
on facilities primarily located on or near the campuses of acute
care hospitals associated with leading health systems. The Company
seeks to reduce financial and operational risk by owning properties
in high-growth markets with a broad tenant mix that includes over
30 physician specialties, as well as surgery, imaging, cancer, and
diagnostic centers.
2022 Investment Activity
In 2022, the Company acquired 33 medical office buildings through
acquisitions and investments in joint ventures. The total purchase
price of the acquisitions was $504.6 million and the weighted
average capitalization rate for these investments was 5.3%. The
following bullets provide further detail of the 2022 acquisition
activity.
•The
Company (exclusive of joint ventures) acquired 28 medical office
buildings for purchase prices totaling $403.6 million.
•Through
its joint ventures, the Company acquired interests in five medical
office buildings for purchase prices totaling $101.0
million.
The Company disposed of 44 properties during 2022 for sales prices
totaling $1.2 billion, including 10 properties contributed into
joint ventures in which the Company maintained a non-controlling
interest. The weighted average capitalization rate for these
properties was 4.8%. The Company calculates the capitalization rate
for dispositions as the in-place cash net operating income divided
by the sales price.
In 2022, the Company funded $60.8 million toward development
and redevelopment of properties.
See the Company's discussion regarding the 2022 acquisition, joint
venture and disposition activity in Note 5 to the Consolidated
Financial Statements and development activity in Note 15 to the
Consolidated Financial Statements. Also, please refer to the
Company's discussion in "Trends and Matters Impacting Operating
Results" as part of Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations included in Part II
of this report.
Competition
The Company competes for the acquisition and development of real
estate properties with private investors, healthcare providers,
other REITs, real estate partnerships and financial institutions,
among others. The business of acquiring and developing new
healthcare facilities is highly competitive and is subject to
price, construction and operating costs, and other competitive
pressures. Some of the Company's competitors may have lower costs
of capital.
The financial performance of all of the Company’s properties is
subject to competition from similar properties. The extent to which
the Company’s properties are utilized depends upon several factors,
including the number of physicians using or referring patients to
an associated healthcare facility, healthcare employment,
competitive systems of healthcare delivery, and the area’s
population, size and composition. Private, federal and state health
insurance programs and other laws and regulations may also have an
effect on the utilization of the properties. The Company’s
properties operate in a competitive environment, and patients and
referral sources, including physicians, may change their
preferences for a healthcare facility from time to
time.
Government Regulation
The facilities owned by the Company are utilized by medical tenants
which are required to comply with extensive regulation and
legislation at the federal, state and local levels, including, but
not limited to, the Patient Protection and Affordable Care Act and
the Health Care and Education Reconciliation Act of 2010
(collectively, the "Affordable Care Act"), the Bipartisan Budget
Act of 2015, the Medicare Access and CHIP Reauthorization Act of
2015, and laws intended to combat fraud, waste and abuse such as
the Anti-Kickback Statute, Stark Law and False Claims Act, and laws
intended to protect the privacy and security of patient
information, such as the Health Insurance Portability and
Accountability Act of 1996. These laws and regulations establish,
among other things, requirements for state licensure and criteria
for medical tenants to participate in government-sponsored
reimbursement programs, including the Medicare and Medicaid
programs. The Company's leases generally require the tenant to
comply with all applicable laws relating to the tenant's use and
occupation of the leased premises. Although lease payments to the
Company are not directly affected by these laws and regulations,
changes in these programs or the loss by a tenant of its license or
ability to participate in government-sponsored reimbursement
programs could have a material adverse effect on the tenant's
ability to make lease payments to the Company.
Government healthcare programs have increased over time as a
significant percentage of the U.S. population’s health insurance
coverage. The Medicare and Medicaid programs are highly regulated
and subject to frequent evaluation and change. Changes from year to
year in reimbursement methodology, rates and other regulatory
requirements may cause the profitability of providing care to
Medicare and Medicaid patients to decline, which could adversely
affect tenants' ability to make lease payments to the
Company.
The Centers for Medicare and Medicaid Services continued to adjust
Medicare payment rates in 2022 to implement site-neutral payment
policies. These changes have lowered Medicare payments for services
delivered in off-campus hospital outpatient departments in an
effort to lessen reimbursement disparity in off-campus medical
office and outpatient facilities. The Company’s medical office
buildings that are located on hospital campuses could become more
valuable as hospital tenants will keep their higher Medicare rates
for on-campus outpatient services. However,
the Company has not seen a measurable impact from site-neutral
Medicare payment policy, positively or negatively. The Company
cannot predict the amount of benefit from these measures or if
other federal health policy will ultimately require cuts to
reimbursement rates for services provided in other settings. The
Company cannot predict the degree to which these changes, or
changes to federal healthcare programs in general, may affect the
economic performance of some or all of the Company's tenants,
positively or negatively.
Since 2018, physicians have been required to report patient data on
quality and performance measures that began to affect their
Medicare payments in 2020. Implementation of the Medicare Access
and CHIP Reauthorization Act of 2015 (“MACRA”), and the ongoing
debate over the most effective payment system to use to promote
value-based reimbursement, along with its budget-neutrality rule
that requires any increases in payments to be offset by decreases,
present the industry and its individual participants with
uncertainty and financial risk. The Company cannot predict the
degree to which any such changes may affect the economic
performance of the Company's tenants or, indirectly, the
Company.
Legislative Developments
Taxation of Dividends
The Tax Cuts and Jobs Act of 2017 generally allows a deduction for
individuals equal to 20% of certain income from pass-through
entities, including ordinary dividends distributed by a REIT
(excluding capital gain dividends and qualified dividend income).
In addition, the deduction for ordinary REIT dividends is not
subject to the wage and tax basis limitations applicable to the
deduction for other qualifying pass-through income. The Tax Cuts
and Jobs Act of 2017 was a far-reaching and complex revision to the
existing U.S. federal income tax laws. Many of the provisions of
this act, such as the 20% deduction mentioned above, will expire at
the end of 2025, unless extended by legislative
action.
Healthcare
Each year, legislative proposals for health policy are introduced
in Congress and state legislatures, and regulatory changes are
proposed and enacted by government agencies. These proposals,
individually or in the aggregate, could significantly change the
delivery of healthcare services, either nationally or at the state
level, if implemented. Examples of significant legislation or
regulatory action recently proposed, enacted, or in the process of
implementation include:
•the
Coronavirus Aid, Relief and Economic Security Act of 2020, along
with subsequent stimulus and COVID-19 relief bills and federal
spending legislation, which provided relief funding and financial
aid to businesses, individuals, and healthcare providers impacted
by COVID-19, including higher Medicare reimbursement rates,
forgiveness of small business loans to providers for payroll and
rent, and additional resources for testing and vaccine
distribution;
•the
expansion of Medicaid benefits and health insurance exchanges
established by the Affordable Care Act, whereby individuals and
small businesses purchase health insurance with assistance from
federal subsidies;
•various
state legislature proposals for state-funded single-payer health
insurance and a limit on allowable rates of reimbursement to
healthcare providers;
•the
implementation of quality control, cost containment, and
value-based payment system reforms for Medicaid and Medicare, such
as expansion of pay-for-performance criteria, bundled provider
payments, accountable care organizations, comparative effectiveness
research, and lower payments for hospital
readmissions;
•ongoing
evaluation of and transition toward value-based reimbursement
models for Medicare payments to physicians as designated under
MACRA;
•annual
regulatory updates to Medicare policy for healthcare providers that
can broadly change reimbursement methodology under budget-neutral
guidelines, with the effect of lowering payments for some services
and increasing payments for others, having a varying impact,
positively or negatively, on providers;
•ongoing
efforts to equalize Medicare payment rates across different
facility-type settings, according to Section 603 of the Bipartisan
Budget Act of 2015, which lowered Medicare payment rates, effective
January
1, 2017, for services provided in off-campus, provider-based
outpatient departments to the same level of rates for physician
office settings;
•the
continued adoption by providers of federal standards for the
Medicare Promoting Interoperability Program;
•reforms
to the physician self-referral laws, commonly referred to as the
Stark Law, as adjusted in 2020 in order to promote the transition
toward value-based, coordinated care among providers, although
clear intent to boost referrals could still yield provider
penalties;
•consideration
of broad reforms to Medicare and Medicaid, including a significant
expansion of Medicare coverage to the greater U.S.
population;
•more
stringent regulatory criteria by which federal antitrust agencies
evaluate the potential for anti-competitive practices as a result
of mergers and acquisitions of health systems and
physicians;
•regulations
requiring the publication of hospital prices for certain services,
as well as hospitals’ negotiated rates with insurers for these
services;
•limits
on price increases in pharmaceutical drugs and the cost to Medicare
beneficiaries, including the potential for setting prices according
to an international standard; and
•the
prohibition of “surprise billing,” or high payment rates charged to
consumers for out-of-network physician services.
The Company cannot predict whether any proposals, rulings, or
legislation will be fully implemented, adopted, repealed, or
amended, or what effect, whether positive or negative, such
developments might have on the Company's business.
Environmental Matters
Under various federal, state and local environmental laws,
ordinances and regulations, an owner of real property (such as the
Company) may be liable for the costs of removal or remediation of
certain hazardous or toxic substances at, under, or disposed of in
connection with such property, as well as certain other potential
costs (including government fines and injuries to persons and
adjacent property) relating to hazardous or toxic substances. Most,
if not all, of these laws, ordinances and regulations contain
stringent enforcement provisions including, but not limited to, the
authority to impose substantial administrative, civil, and criminal
fines and penalties upon violators. Such laws often impose
liability without regard to whether the owner knew of, or was
responsible for, the presence or disposal of such substances, and
liability may be imposed on the owner in connection with the
activities of a tenant or operator of the property. The cost of any
required remediation, removal, fines or personal or property
damages and the owner’s liability therefore could exceed the value
of the property and/or the aggregate assets of the owner. In
addition, the presence of such substances, or the failure to
properly dispose of or remediate such substances, may adversely
affect the owner’s ability to sell or lease such property or to
borrow using such property as collateral. A property can also be
negatively impacted either through physical contamination, or by
virtue of an adverse effect on value, from contamination that has
or may have emanated from other properties.
Operations of the properties owned, developed or managed by the
Company are and will continue to be subject to numerous federal,
state, and local environmental laws, ordinances and regulations,
including those relating to the following: the generation,
segregation, handling, packaging and disposal of medical wastes;
air quality requirements related to operations of generators,
incineration devices, or sterilization equipment; facility siting
and construction; disposal of non-medical wastes and ash from
incinerators; and underground storage tanks. Certain properties
owned, developed or managed by the Company contain, and others may
contain or at one time may have contained, underground storage
tanks that are or were used to store waste oils, petroleum products
or other hazardous substances. Such underground storage tanks can
be the source of releases of hazardous or toxic materials.
Operations of nuclear medicine departments at some properties also
involve the use and handling, and subsequent disposal of,
radioactive isotopes and similar materials, activities which are
closely regulated by the Nuclear Regulatory Commission and state
regulatory agencies. In addition, several of the Company's
properties were built during the period that asbestos was commonly
used in building construction and other such facilities may be
acquired by the
Company in the future. The presence of such materials could result
in significant costs in the event that any asbestos-containing
materials requiring immediate removal and/or encapsulation are
located in or on any facilities or in the event of any future
renovation activities.
The Company has had environmental site assessments conducted on
substantially all of the properties that it currently owns. These
site assessments are limited in scope and provide only an
evaluation of potential environmental conditions associated with
the property, not compliance assessments of ongoing operations.
While it is the Company’s policy to seek indemnification from
tenants relating to environmental liabilities or conditions, even
where leases do contain such provisions, there can be no assurance
that the tenant will be able to fulfill its indemnification
obligations. In addition, the terms of the Company’s leases do not
give the Company control over the operational activities of its
tenants or healthcare operators, nor will the Company monitor the
tenants or healthcare operators with respect to environmental
matters.
Human Capital Resources
We believe our employees are a critical component to achievement of
our business objectives and recognition as a trusted owner and
operator of medical office properties. At December 31, 2022,
the Company employed 583 people. Our employees are comprised of
accountants, maintenance engineers, property managers, leasing
personnel, architects, administrative staff, an investments team,
and the corporate management team. By supporting, recognizing, and
investing in our employees, we believe that we are able to attract
and retain the highest quality talent. We are committed to
fostering, cultivating, and preserving a culture of diversity and
inclusion. We embrace employee differences in race, color,
religion, sex, sexual orientation, national origin, age,
disability, veteran status, and other characteristics that make our
employees unique.
To retain talented employees that contribute to the Company’s
strategic objectives, we offer an attractive set of employee
benefits, including:
•Health
benefits and 401(k) starting on the first day of
employment;
•Auto-enrollment
of new employees in our 401(k) plan at 3%;
•Dollar-for-dollar
match on 401(k) contributions up to $2,800, encouraging higher
employee savings;
•100%
of long-term disability and life insurance premiums paid;
and
•Tuition
reimbursement up to $3,000 annually for any employee pursuing
higher education.
In addition, we are committed to supporting the performance and
career development of all employees, from encouraging staff
accountants to sit for the CPA exam to supporting our maintenance
engineers in earning various certifications. As owners and
operators of medical real estate, we recognize the value of health
and wellbeing among our own employees. As we have for many years,
Healthcare Realty provides corporate employees with gym membership
discounts to encourage fitness. In addition, we offer monthly
wellness challenges and resources that provide our employees with
tools to enhance their wellbeing. Additional information regarding
employee and community engagement is available in the 2022
Corporate Responsibility Report, which is posted on the Company's
website (www.healthcarerealty.com).
Environment, Social, and Governance (“ESG”)
Our goal is to create long-term value for all stakeholders,
including our employees and investors who expect responsible
financial and environmental stewardship, and for our healthcare
system partners who rely on the Company to provide well-operated
facilities that allow them to effectively serve and care for their
local communities.
We seek to help healthcare professionals deliver the best care by
providing the highest level of service in the most desirable
outpatient settings. Our ESG objectives include full integration of
our sustainability strategy, improved transparency and reporting,
enhanced operational frameworks, and continued stakeholder
engagement.
As we implement our strategy and pursue our objectives, the
Company’s actions are guided by our Sustainability Principles and
Policies, to ensure continuous improvement and long-term success.
Our Sustainability Principles and Policies include:
a.Integration:
Embed and integrate leading environmental, social and governance
practices designed to enhance portfolio performance into the
Company’s daily operations.
b.Impact:
Drive positive impact across the Company while mitigating risk and
creating long-term value for stakeholders, including our tenants,
investors, employees, and the communities in which we live, work
and invest.
c.Integrity:
Conduct business with integrity, respect and excellence, earning
the right to be a preferred provider of medical office
properties.
The Company’s Board of Directors is committed to overseeing the
integration of our ESG principles throughout the Company. In
addition, the Company's incentive program for executive officers
includes ESG performance measures.
To more effectively track and communicate the Company’s ESG
performance, we have adopted various frameworks and methodologies,
including participation in the annual GRESB Assessment; reporting
disclosures in alignment with the Sustainability Accounting
Standards Board; establishing goals and key performance indicators
under the Sustainable Development Goals, and we are working toward
expanding our climate risk and resiliency strategies in alignment
with the Task Force on Climate-Related Disclosure.
More information regarding the Company’s Sustainability Principles
and Policies and ESG performance can be found in the Company’s 2022
Corporate Responsibility Report on its website (www.healthcarerealty.com).
Available Information
The Company makes available to the public free of charge through
its website the Company’s Proxy Statement, Annual Report on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), as soon as reasonably practicable
after the Company electronically files such reports with, or
furnishes such reports to, the Securities and Exchange Commission
("SEC"). The Company’s website address is
www.healthcarerealty.com.
Corporate Governance Principles
The Company has adopted Corporate Governance Principles relating to
the conduct and operations of the Board of Directors. The Corporate
Governance Principles are posted on the Company’s website
(www.healthcarerealty.com)
and are available in print to any stockholder who requests a
copy.
Committee Charters
The Board of Directors has an Audit Committee, Compensation
Committee, and Nominating and Corporate Governance Committee. The
Board of Directors has adopted written charters for each committee,
which are posted on the Company’s website (www.healthcarerealty.com)
and are available in print to any stockholder who requests a
copy.
Executive Officers
Information regarding the executive officers of the Company is set
forth in Part III, Item 10 of this report and is incorporated
herein by reference.
Item 1A. Risk Factors
The following are some of the risks and uncertainties that could
negatively affect the Company’s consolidated financial condition,
results of operations, business and prospects. These risk factors
are grouped into four categories: risks relating to the
Company's merger and integration of Legacy HR and Legacy HTA
businesses; risks relating to the Company’s business and
operations; risks relating to the Company’s capital structure and
financings; and risks relating to government
regulations.
These risks, as well as the risks described in Item 1 under
the headings “Competition,” “Government Regulation,” “Legislative
Developments,” and “Environmental Matters,” and in Item 7
under the heading “Disclosure Regarding Forward-Looking
Statements,” should be carefully considered before making an
investment decision regarding the
Company. The risks and uncertainties described below are not the
only ones facing the Company, and there may be additional risks
that the Company does not presently know of or that the Company
currently considers not likely to have a material impact. If any of
the events underlying the following risks actually occurred, the
Company’s business, consolidated financial condition, operating
results and cash flows, including distributions to the Company's
stockholders, could suffer, and the trading price of its common
stock could decline.
Merger and Integration Risks
The Company incurred substantial expenses related to the
Merger.
The Company incurred substantial expenses in connection with
completing the Merger and expects to incur substantial expenses
integrating the business, operations, networks, systems,
technologies, policies and procedures of the two companies,
including severance costs. In addition, there are a large number of
systems that must be integrated, including billing, management
information, asset management, accounting and finance, payroll and
benefits, lease administration and regulatory compliance. Although
the Company assumed that a certain level of transaction and
integration expenses would be incurred, there are a number of
factors beyond its control that could affect the total amount or
the timing of its integration expenses. The transaction and
integration expenses associated with the Merger could, particularly
in the near term, exceed the savings that the Company expects to
achieve from the elimination of duplicative expenses and the
realization of economies of scale and cost savings related to the
integration of the businesses.
The Company may be unable to integrate the businesses of Legacy HR
and Legacy HTA successfully and realize the anticipated synergies
and related benefits of the Merger or do so within the anticipated
timeframe.
The Merger involved the combination of two companies that operated
as independent public companies. The Company is devoting
significant management attention and resources to integrate the
business practices and operations of Legacy HR and Legacy HTA.
Potential difficulties the Company may encounter in the integration
process include the following:
1.the
inability to successfully combine the businesses of Legacy HR and
Legacy HTA in a manner that permits the Company to achieve the cost
savings anticipated to result from the Merger, which would result
in the anticipated benefits of the Merger not being realized in the
timeframe currently anticipated or at all;
2.the
complexities associated with managing the combined businesses out
of different locations and integrating personnel from the two
companies;
3.the
additional complexities of combining two companies with different
histories, cultures, markets and tenant bases;
4.the
failure to retain key employees of the Company; and
5.potential
unknown liabilities and unforeseen increased expenses, delays or
regulatory conditions associated with the Merger.
For all these reasons, you should be aware that it is possible that
the integration process could result in the distraction of the
Company's management, the disruption of the Company's ongoing
business or inconsistencies in the Company's services, standards,
controls, procedures and policies, any of which could adversely
affect the ability of the Company to maintain relationships with
tenants, health systems, vendors and employees or to achieve the
anticipated benefits of the Merger, or could otherwise adversely
affect the business and financial results of the
Company.
The Company may be unable to retain key
employees.
The success of the Company depends in part upon its ability to
retain key employees. Key employees may depart because of issues
relating to the uncertainty and difficulty of integration or a
desire not to remain with the Company following the Merger or for
other reasons. Accordingly, no assurance can be given that the
Company will be able to retain key employees.
The trading price of shares of common stock of the Company may be
affected by factors different from those that affected the price of
shares of Legacy HR's common stock or Legacy HTA’s common stock
before the Merger.
The results of operations of the Company, as well as the trading
price of the shares of common stock of the Company, may be affected
by factors different from those that affected Legacy HR's or Legacy
HTA's results of operations and the trading prices of their
respective shares of common stock. These factors include: (i) a
greater number of shares of common stock of the Company
outstanding; (ii) different stockholders; (iii) different
businesses; and (iv) different assets and
capitalizations.
In addition, the Company may take actions in the future—such as a
share split, reverse share split, stock repurchases, or
reclassification—that could affect the trading price of its shares
of common stock.
Accordingly, the historical trading prices and financial results of
Legacy HR and Legacy HTA may not be indicative of these matters for
the Company after the Merger.
The Company cannot assure you that it will be able to continue
paying dividends at or above the rates paid by Legacy HR and Legacy
HTA.
The stockholders of the Company may not receive dividends at the
same rate they received dividends as stockholders of Legacy HR and
stockholders of Legacy HTA for various reasons, including the
following: (i) the Company may not have enough cash to pay such
dividends due to changes in the Company's cash requirements,
capital spending plans, cash flow or financial position; (ii)
decisions on whether, when and in which amounts to make any future
distributions will remain at all times entirely at the discretion
of the Board of Directors of the Company, which reserves the right
to change the Company's current dividend practices at any time and
for any reason; (iii) the Company may desire to retain cash to
maintain or improve its credit ratings; and (iv) the amount of
dividends that the Company's subsidiaries may distribute to the
Company may be subject to restrictions imposed by state law,
restrictions that may be imposed by state regulators, and
restrictions imposed by the terms of any current or future
indebtedness that these subsidiaries may incur.
Stockholders of the Company do not have contractual or other legal
right to dividends that have not been authorized by the Board of
Directors of the Company.
Risk relating to our business and operations
The Company's expected results may not be achieved.
The Company's expected results may not be achieved, and actual
results may differ materially from expectations. This may be the
result of various factors, including, but not limited to: changes
in the economy; the availability and cost of capital at favorable
rates; increases in property taxes, utilities and other operating
expenses; changes to facility-related healthcare regulations;
changes in interest rates; competition for quality assets; negative
developments in the operating results or financial condition of the
Company's tenants, including, but not limited to, their ability to
pay rent; the Company's ability to reposition or sell facilities
with profitable results; the Company's ability to re-lease space at
similar rates as vacancies occur; the Company's ability to timely
reinvest proceeds from the sale of assets at similar yields;
government regulations affecting tenants' Medicare and Medicaid
reimbursement rates and operational requirements; unanticipated
difficulties and/or expenditures relating to future acquisitions
and developments; changes in rules or practices governing the
Company's financial reporting; and other legal and operational
matters.
The Company may from time to time decide to sell properties and may
be required under purchase options to sell certain properties. The
Company may not be able to reinvest the proceeds from sales at
rates of return equal to the return received on the properties
sold. Uncertain market conditions could result in the Company
selling properties at unfavorable prices or at losses in the
future.
The Company’s revenues depend on the ability of its tenants under
its leases to generate sufficient income from their operations to
make rental payments to the Company.
The Company’s revenues are subject to the financial strength of its
tenants and associated health systems. The Company has no
operational control over the business of these tenants and
associated health systems who face a wide range of economic,
competitive, government reimbursement and regulatory pressures and
constraints, including the loss of licensure or certification. Any
slowdown in the economy, decline in the availability of financing
from the
capital markets, and changes in healthcare regulations may
adversely affect the businesses of the Company’s tenants to varying
degrees. Such conditions may further impact such tenants’ abilities
to meet their obligations to the Company and, in certain cases,
could lead to restructurings, disruptions, or bankruptcies of such
tenants. The Company leases to government tenants from time to time
that may be subject to annual budget appropriations. If a
government tenant fails to receive its annual budget appropriation,
it might not be able to make its lease payments to the Company. In
addition, defaults under leases with federal government tenants are
governed by federal statute and not by state eviction or rent
deficiency laws. These conditions could adversely affect the
Company’s revenues and could increase allowances for losses and
result in impairment charges, which could decrease net income
attributable to common stockholders and equity, and reduce cash
flows from operations.
Pandemics, such as COVID-19 and other pandemics that may occur in
the future, and measures intended to prevent their spread or
mitigate their severity could have a material adverse effect on the
Company's business, results of operations, cash flows and financial
condition.
The COVID-19 pandemic has had, and another pandemic in the future
could have, repercussions across regional and global economies and
financial markets. During 2020, all of the states and cities in
which the Company owns properties, manages properties, and/or has
development or redevelopment projects instituted quarantines,
restrictions on travel, “shelter in place” rules, restrictions on
types of businesses that may continue to operate, and/or
restrictions on the types of construction projects that may
continue. As a result, a number of the Company's tenants
temporarily closed their offices or clinical space or operated on a
reduced basis in response to government requirements or
recommendations.
The COVID-19 pandemic also caused, and may continue to cause,
severe economic, market and other disruptions worldwide. There can
be no assurance that the Company's access to capital and other
sources of funding will not become constrained, which could
adversely affect the availability and terms of future borrowings,
renewals or refinancings. In addition, the deterioration of
economic conditions, including supply chain constraints, as a
result of the pandemic may ultimately decrease occupancy levels and
average rent per square foot across the Company's portfolio as
tenants reduce or defer their spending.
The extent of the COVID-19 pandemic’s effect, or the effect of new
virus variants or of another pandemic in the future, on the
Company's operational and financial performance will depend on
future developments, including the duration, spread and intensity
of the outbreak, the availability and effectiveness of vaccines,
and the effect of government requirements or recommendations, all
of which are uncertain and difficult to predict.
Owning real estate and indirect interests in real estate is subject
to inherent risks.
The Company’s operating performance and the value of its real
estate assets are subject to the risk that if its properties do not
generate revenues sufficient to meet its operating expenses,
including debt service, the Company’s cash flow and ability to pay
dividends to stockholders will be adversely affected.
The Company may incur impairment charges on its real estate
properties or other assets.
The Company performs an impairment review on its real estate
properties every year. In addition, the Company assesses the
potential for impairment of identifiable intangible assets and
long-lived assets, including real estate properties, whenever
events occur or a change in circumstances indicates that the
recorded value might not be fully recoverable. The decision to sell
a property also requires the Company to assess the potential for
impairment. The Company incurred impairment charges of $54.4
million in 2022, associated with completed or planned disposition
activity. The Company may determine in future periods that an
impairment has occurred in the value of one or more of its real
estate properties or other assets. In such an event, the Company
may be required to recognize an impairment which could have a
material adverse effect on the Company’s consolidated financial
condition and results of operations.
The Company has properties subject to purchase options that expose
it to reinvestment risk and reduction in expected investment
returns.
The Company had approximately $100.4 million, or 0.71%, of real
estate property investments that were subject to purchase options
held by lessees that were exercisable as of December 31, 2022.
Other properties have purchase options that will become exercisable
after 2022. Properties with purchase options exercisable in 2022
produced aggregate net operating income of approximately $9.6
million in 2022. The exercise of these purchase options
exposes
the Company to reinvestment risk and a reduction in investment
return. Certain properties subject to purchase options may be
purchased at rates of return above the rates of return the Company
expects to achieve with new investments. If the Company is unable
to reinvest the sale proceeds at rates of return equal to the
return received on the properties that are sold, it may experience
a decline in lease revenues and profitability and a corresponding
material adverse effect on the Company’s consolidated financial
condition and results of operations.
For more specific information concerning the Company’s purchase
options, see “Purchase Options” in the “Trends and Matters
Impacting Operating Results” as a part of Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations included in Part II of this report.
If the Company is unable to promptly re-let its properties, if the
rates upon such re-letting are significantly lower than the
previous rates or if the Company is required to undertake
significant expenditures or make significant leasing concessions to
attract new tenants, then the Company’s business, consolidated
financial condition and results of operations would be adversely
affected.
A portion of the Company’s leases will expire over the course of
any year. For more specific information concerning the Company’s
expiring leases, see "Expiring Leases" in the "Trends and Matters
Impacting Operating Results" as part of Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations included in Part II of this report. The Company may not
be able to re-let space on terms that are favorable to the Company
or at all. Further, the Company may be required to make significant
capital expenditures to renovate or reconfigure space or make
significant leasing concessions to attract new
tenants.
Certain of the Company’s properties are special purpose healthcare
facilities and may not be easily adaptable to other
uses.
Some of the Company’s properties are specialized medical
facilities. If the Company or the Company’s tenants terminate the
leases for these properties or the Company’s tenants lose their
regulatory authority to operate such properties, the Company may
not be able to locate suitable replacement tenants to lease the
properties for their specialized uses. Alternatively, the Company
may be required to spend substantial amounts to adapt the
properties to other uses. Any loss of revenues and/or additional
capital expenditures occurring as a result may have a material
adverse effect on the Company’s consolidated financial condition
and results of operations.
The Company has, and in the future may have more, exposure to fixed
rent escalators, which could lag behind inflation and the growth in
operating expenses such as real estate taxes, utilities, insurance,
and maintenance expense.
The Company receives a significant portion of its revenues by
leasing assets subject to fixed rent escalations. Approximately 94%
of leases have increases that are based upon fixed percentages and
approximately 6% of leases have increases based on the Consumer
Price Index. To the extent fixed percentage increases lag behind
inflation and operating expense growth, the Company's performance,
growth, and profitability would be negatively impacted. As of
December 31, 2022, the Company had weighted average annual fixed
rent escalators of 2.77%.
The Company’s real estate investments are illiquid and the Company
may not be able to sell properties strategically targeted for
disposition.
Because real estate investments are relatively illiquid, the
Company’s ability to adjust its portfolio promptly in response to
economic or other conditions is limited. Certain significant
expenditures generally do not change in response to economic or
other conditions, including debt service (if any), real estate
taxes, and operating and maintenance costs. This combination of
variable revenue and relatively fixed expenditures may result in
reduced earnings and could have an adverse effect on the Company’s
financial condition. In addition, the Company may not be able to
sell properties targeted for disposition, including properties held
for sale, due to adverse market conditions. This may negatively
affect, among other things, the Company’s ability to sell
properties on favorable terms, execute its operating strategy,
repay debt, or pay dividends.
The Company is subject to risks associated with the development and
redevelopment of properties.
The Company expects development and redevelopment of properties
will continue to be a key component of its growth plans. The
Company is subject to certain risks associated with the development
and redevelopment of properties including the
following:
•The
construction of properties generally requires various government
and other approvals that may not be received when expected, or at
all, which could delay or preclude commencement of
construction;
•Opportunities
that the Company pursued but later abandoned could result in the
expensing of pursuit costs, which could impact the Company’s
consolidated results of operations;
•Construction
costs could exceed original estimates, which could impact the
building’s profitability to the Company;
•Operating
expenses could be higher than forecasted;
•Time
required to initiate and complete the construction of a property
and to lease up a completed property may be greater than originally
anticipated, thereby adversely affecting the Company’s cash flow
and liquidity;
•Occupancy
rates and rents of a completed development property may not be
sufficient to make the property profitable to the Company;
and
•Favorable
capital sources to fund the Company’s development and redevelopment
activities may not be available when needed.
The Company may make material acquisitions and undertake
developments and redevelopments that may involve the expenditure of
significant funds and may not perform in accordance with
management’s expectations.
The Company regularly pursues potential transactions to acquire,
develop or redevelop real estate assets. Future acquisitions could
require the Company to issue equity securities, incur debt or other
contingent liabilities or amortize expenses related to other
intangible assets, any of which could adversely impact the
Company’s consolidated financial condition or results of
operations. In addition, equity or debt financing required for such
acquisitions may not be available at favorable times or
rates.
The Company’s acquired, developed, redeveloped and existing real
estate properties may not perform in accordance with management’s
expectations because of many factors including the
following:
•The
Company’s purchase price for acquired facilities may be based upon
a series of market or building-specific judgments which may be
incorrect;
•The
costs of any maintenance or improvements for properties might
exceed estimated costs;
•The
Company may incur unexpected costs in the acquisition, construction
or maintenance of real estate assets that could impact its expected
returns on such assets; and
•Leasing
may not occur at all, within expected time frames or at expected
rental rates.
Further, the Company can give no assurance that acquisition,
development and redevelopment opportunities that meet management’s
investment criteria will be available when needed or
anticipated.
The Company is exposed to risks associated with geographic
concentration.
As of December 31, 2022, the Company had investment
concentrations of greater than 5% of its total investments in the
Dallas, Texas (9.2%), Houston, Texas (5.6%), and Seattle,
Washington (5.0%) markets. These concentrations increase the
exposure to adverse conditions that might affect these markets,
including natural disasters, local economic conditions, local real
estate market conditions, increased competition, state and local
regulation (including property taxes) and other localized events or
conditions.
Many of the Company’s leases are dependent on the viability of
associated health systems. Revenue concentrations relating to these
leases expose the Company to risks related to the financial
condition of the associated health systems.
Most of the Company’s properties on or adjacent to hospital
campuses are largely dependent on the viability of the health
system’s campus where they are located, whether or not the hospital
or health system is a tenant in such properties. The viability of
these health systems depends on factors such as the quality and mix
of healthcare services provided, competition, demographic trends in
the surrounding community, market position and growth potential. If
one of these hospitals is unable to meet its financial obligations,
is unable to compete successfully, or is forced to close or
relocate, the Company’s properties on or near such hospital campus
could be adversely impacted.
Many of the Company’s properties are held under ground leases.
These ground leases contain provisions that may limit the Company’s
ability to lease, sell, or finance these properties.
As of December 31, 2022, the Company had 242 properties that
were held under ground leases, representing an aggregate gross
investment of approximately $5.6 billion. The weighted average
remaining term of the Company's ground leases is approximately 64.4
years, including renewal options. The Company’s ground lease
agreements with hospitals and health systems typically contain
restrictions that limit building occupancy to physicians on the
medical staff of an affiliated hospital and prohibit tenants from
providing services that compete with the services provided by the
affiliated hospital. Ground leases may also contain consent
requirements or other restrictions on sale or
assignment of the Company’s leasehold interest, including rights of
first offer and first refusal in favor of the lessor. These ground
lease provisions may limit the Company’s ability to lease, sell, or
obtain mortgage financing secured by such properties which, in
turn, could adversely affect the income from operations or the
proceeds received from a sale. As a ground lessee, the Company is
also exposed to the risk of reversion of the property upon
expiration of the ground lease term, or an earlier breach by the
Company of the ground lease, which may have a material adverse
effect on the Company’s consolidated financial condition and
results of operations.
The Company may experience uninsured or underinsured
losses.
The Company carries comprehensive liability insurance and property
insurance covering its owned and managed properties. A portion of
the property insurance is provided by a wholly-owned captive
insurance company. In addition, tenants under single-tenant leases
are required to carry property insurance covering the Company’s
interest in the buildings. Some types of losses may be uninsurable
or too expensive to insure against. Insurance companies, including
the captive insurance company, limit or exclude coverage against
certain types of losses, such as losses due to named windstorms,
terrorist acts, earthquakes, toxic mold, and losses without direct
physical loss, such as business interruptions occurring from
pandemics. Accordingly, the Company may not have sufficient
insurance coverage against certain types of losses and may
experience decreases in the insurance coverage available. Should an
uninsured loss or a loss in excess of insured limits occur, the
Company could lose all or a portion of the capital it has invested
in a property, as well as the anticipated future revenue from the
property. In such an event, the Company might remain obligated for
any mortgage debt or other financial obligation related to the
property. Further, if any of the Company's insurance carriers were
to become insolvent, the Company would be forced to replace the
existing coverage with another suitable carrier, and any
outstanding claims would be at risk for collection. In such an
event, the Company cannot be certain that the Company would be able
to replace the coverage at similar or otherwise favorable
terms.
The Company has obtained title insurance policies for each of its
properties, typically in an amount equal to its original price.
However, these policies may be for amounts less than the current or
future values of our properties. In such an event, if there is a
title defect relating to any of the Company's properties, it could
lose some of the capital invested in and anticipated profits from
such property. The Company cannot give assurance that material
losses in excess of insurance proceeds will not occur in the
future.
Damage from catastrophic weather and other natural events, whether
caused by climate change or otherwise, could result in losses to
the Company.
Many of our properties are located in areas susceptible to revenue
loss, cost increase, or damage caused by severe weather conditions
or natural disasters such as wildfires, hurricanes, earthquakes,
tornadoes and floods. The Company could experience losses to the
extent that such damages exceed insurance coverage, cause an
increase in insurance premiums, and/or a decrease in demand for
properties located in such areas. In the event that climate change
causes such catastrophic weather or other natural events to
increase broadly or in localized areas, such costs and damages
could increase above historic expectations. In addition, changes in
federal and state legislation and regulation on climate change
could result in increased capital expenditures to improve energy
efficiency of our existing properties and could require the Company
to spend more on development and redevelopment properties without a
corresponding increase in revenue.
The Company faces risks associated with security breaches through
cyber attacks, cyber intrusions, or otherwise, as well as other
significant disruptions of its information technology networks and
related systems.
The Company faces risks associated with security breaches, whether
through cyber attacks or cyber intrusions over the Internet,
malware, computer viruses, attachments to emails, persons inside
the Company, or persons with access to systems inside the Company,
and other significant disruptions of the Company's information
technology ("IT") networks and related systems. The risk of a
security breach or disruption, particularly through cyber attack or
cyber intrusion, including by computer hackers, foreign governments
and cyber terrorists, has generally increased as the number,
intensity, and sophistication of attempted attacks and intrusions
from around the world have increased. The Company's IT networks and
related systems are essential to the operation of its business and
its ability to perform day-to-day operations (including managing
building systems) and, in some cases, may be critical to the
operations of certain of our tenants. Although the Company makes
efforts to maintain the security and integrity of these types of IT
networks and related systems, it has experienced breaches. While
breaches to date have not had a material
impact, and we have implemented various measures to manage the risk
of a security breach or disruption, there can be no assurance that
these security measures will be effective or that future attempted
security breaches or disruptions would not be successful or
damaging. Even the most well protected information, networks,
systems, and facilities remain potentially vulnerable because the
techniques used in such attempted security breaches evolve and
generally are not recognized until launched against a target, and
in some cases are designed not to be detected and may not be
detected. Accordingly, we may be unable to anticipate these
techniques or to implement adequate security barriers or other
preventive measures, and it is therefore impossible to entirely
mitigate the risk.
A security breach or other significant disruption involving the
Company's IT network and related systems could:
•disrupt
the proper functioning of the Company's networks and systems and
therefore the Company's operations and/or those of certain
tenants;
•result
in misstated financial reports, violations of loan covenants,
missed reporting deadlines, and/or missed permitting
deadlines;
•result
in the Company's inability to properly monitor its compliance with
the rules and regulations regarding the Company's qualification as
a REIT;
•result
in the unauthorized access to, and destruction, loss, theft,
misappropriation or release of proprietary, confidential,
sensitive, or otherwise valuable information of the Company or
others, which others could use to compete against the Company or
which could expose it to damage claims by third-parties for
disruption, destructive, or otherwise harmful purposes or
outcomes;
•result
in the Company's inability to maintain the building systems relied
upon by the its tenants for the efficient use of their leased
space;
•require
significant management attention and resources to remedy any
damages that result;
•subject
the Company to claims for breach of contract, damages, credits,
penalties, or termination of leases or other agreements;
or
•damage
the Company's reputation among its tenants and investors
generally.
Although the Company carries cyber risk insurance, losses could
exceed insurance coverage available and any or all of the foregoing
could have a material adverse effect on the Company's consolidated
financial condition and results of operations.
The Company may structure acquisitions of property in exchange for
limited partnership units of the OP on terms that could limit its
liquidity or flexibility.
The Company may acquire properties by issuing limited partnership
units of the OP in exchange for a property owner contributing
property to the Company. If the Company continues to enter into
such transactions in order to induce the contributors of such
properties to accept units of the OP rather than cash in exchange
for their properties, it may be necessary for the Company to
provide additional incentives. For instance, the OP's limited
partnership agreement provides that any holder of units may
exchange limited partnership units on a one-for-one basis for
shares of common stock or, at the Company's option, cash equal to
the value of an equivalent number of shares of the Company's common
stock. The Company may, however, enter into additional contractual
arrangements with contributors of property under which it would
agree to repurchase a contributor’s units for shares of the
Company's common stock or cash, at the option of the contributor,
at set times. If the contributor required the Company to repurchase
units for cash pursuant to such a provision, it would limit the
Company's liquidity and, thus, its ability to use cash to make
other investments, satisfy other obligations or make distributions
to stockholders. Moreover, if the Company were required to
repurchase units for cash at a time when it did not have sufficient
cash to fund the repurchase, the Company might be required to sell
one or more of its properties to raise funds to satisfy this
obligation. Furthermore, the Company might agree that if
distributions the contributor received as a limited partner in the
OP did not provide the contributor with an established return
level, then upon redemption of the contributor’s units the Company
would pay the contributor an additional amount necessary to achieve
that return. Such a provision could further negatively impact our
liquidity and flexibility. Finally, in order to allow a contributor
of a property to defer taxable gain on the contribution of property
to the OP, the Company might agree not to sell a contributed
property for a defined period of time or until the contributor
exchanged the contributor’s units for cash or shares. Such an
agreement would prevent
the Company from selling those properties, even if market
conditions would allow such a sale to be favorable to the
Company.
Risks relating to our capital structure and financings
The Company has incurred significant debt obligations and may incur
additional debt and increase leverage in the future.
As of December 31, 2022, the Company had approximately
$5.7 billion of outstanding indebtedness excluding discounts,
premiums and debt issuance costs. Covenants under the Fourth
Amended and Restated Revolving Credit and Term Loan Agreement dated
as of July 20, 2022, among the Company, the OP, and Wells Fargo
Bank, National Association, as Administrative Agent, and the other
lenders that are party thereto, as amended ("Unsecured Credit
Facility"), and the indentures governing the Company's senior notes
permit the Company to incur substantial, additional debt, and the
Company may borrow additional funds, which may include secured
borrowings. A high level of indebtedness would require the Company
to dedicate a substantial portion of its cash flows from operations
to service debt, thereby reducing the funds available to implement
the Company's business strategy and to make distributions to
stockholders. A high level of indebtedness could also:
•limit
the Company’s ability to adjust rapidly to changing market
conditions in the event of a downturn in general economic
conditions or in the real estate and/or healthcare
industries;
•limit
the Company's ability to adjust rapidly to changing market
conditions in the event of a downturn in general economic
conditions or in the real estate and/or healthcare
industries;
•impair
the Company’s ability to obtain additional debt financing or
require potentially dilutive equity to fund obligations and carry
out its business strategy; and
•result
in a downgrade of the rating of the Company’s debt securities by
one or more rating agencies, which would increase the costs of
borrowing under the Unsecured Credit Facility and the cost of
issuance of new debt securities, among other things.
In addition, from time to time, the Company secures mortgage
financing or assumes mortgages to partially fund its investments.
If the Company is unable to meet its mortgage payments, then the
encumbered properties could be foreclosed upon or transferred to
the mortgagee with a consequent loss of income and asset value. A
foreclosure on one or more of the Company's properties could have a
material adverse effect on the Company’s consolidated financial
condition and results of operations.
The Company generally does not intend to reserve funds to retire
existing debt upon maturity. The Company may not be able to repay,
refinance, or extend any or all of our debt at maturity or upon any
acceleration. If any refinancing is done at higher interest rates,
the increased interest expense could adversely affect the Company's
financial condition and results of operations. Any such refinancing
could also impose tighter financial ratios and other covenants that
restrict the Company's ability to take actions that could otherwise
be in its best interest, such as funding new development activity,
making opportunistic acquisitions, or paying
dividends.
Covenants in the Company’s debt instruments limit its operational
flexibility, and a breach of these covenants could materially
affect the Company’s consolidated financial condition and results
of operations.
The terms of the Unsecured Credit Facility, the indentures
governing the Company’s outstanding senior notes and other debt
instruments that the Company may enter into in the future are
subject to customary financial and operational covenants. These
provisions include, among other things: a limitation on the
incurrence of additional indebtedness; limitations on mergers,
investments, acquisitions, redemptions of capital stock, and
transactions with affiliates; and maintenance of specified
financial ratios. The Company’s continued ability to incur debt and
operate its business is subject to compliance with these covenants,
which limit operational flexibility. Breaches of these covenants
could result in defaults under applicable debt instruments, even if
payment obligations are satisfied. Financial and other covenants
that limit the Company’s operational flexibility, as well as
defaults resulting from a breach of any of these covenants in its
debt instruments, could have a material adverse effect on the
Company’s consolidated financial condition and results of
operations.
If lenders under the Unsecured Credit Facility fail to meet their
funding commitments, the Company’s operations and consolidated
financial position would be negatively impacted.
Access to external capital on favorable terms is critical to the
Company’s success in growing and maintaining its portfolio. If
financial institutions within the Unsecured Credit Facility were
unwilling or unable to meet their respective funding commitments to
the Company, any such failure would have a negative impact on the
Company’s operations, consolidated financial condition and ability
to meet its obligations, including the payment of dividends to
stockholders.
The unavailability of equity and debt capital, volatility in the
credit markets, increases in interest rates, or changes in the
Company’s debt ratings could have an adverse effect on the
Company’s ability to meet its debt payments, make dividend payments
to stockholders or engage in acquisition and development
activity.
A REIT is required by the Internal Revenue Code of 1986, as amended
(the “Internal Revenue Code”), to make dividend distributions,
thereby retaining less of its capital for growth. As a result, a
REIT typically requires new capital to invest in real estate
assets. However, there may be times when the Company will have
limited access to capital from the equity and/or debt markets.
Changes in the Company’s debt ratings could have a material adverse
effect on its interest costs and financing sources. The Company’s
debt rating can be materially influenced by a number of factors
including, but not limited to, acquisitions, investment decisions,
and capital management activities. In recent years, the capital and
credit markets have experienced volatility and at times have
limited the availability of funds. The Company’s ability to access
the capital and credit markets may be limited by these or other
factors, which could have an impact on its ability to refinance
maturing debt, fund dividend payments and operations, acquire
healthcare properties and complete development and redevelopment
projects. If the Company is unable to refinance or extend principal
payments due at maturity of its various debt instruments, its cash
flow may not be sufficient to repay maturing debt or make dividend
payments to stockholders. If the Company defaults in paying any of
its debts or satisfying its debt covenants, it could experience
cross-defaults among debt instruments, the debts could be
accelerated and the Company could be forced to liquidate assets for
less than the values it would otherwise receive.
Further, the Company obtains credit ratings from various
credit-rating agencies based on their evaluation of the Company's
credit. These agencies' ratings are based on a number of factors,
some of which are not within the Company's control. In addition to
factors specific to the Company's financial strength and
performance, the rating agencies also consider conditions affecting
REITs generally. The Company's credit ratings could be downgraded.
If the Company's credit ratings are downgraded or other negative
action is taken, the Company could be required, among other things,
to pay additional interest and fees on borrowings under the
Unsecured Credit Facility.
Increases in interest rates could have a material adverse effect on
the Company's cost of capital.
During 2022, the Federal Reserve began, and is expected to
continue, to raise interest rates in an effort to curb inflation.
Increases in interest rates will increase interest cost on new and
existing variable rate debt. Such increases in the cost of capital
could adversely impact our ability to finance operations, acquire
and develop properties, and refinance existing debt. Additionally,
increased interest rates may also result in less liquid property
markets, limiting our ability to sell existing assets.
The Company's swap agreements may not effectively reduce its
exposure to changes in interest rates.
The Company enters into swap agreements from time to time to manage
some of its exposure to interest rate volatility. These swap
agreements involve risks, such as the risk that counterparties may
fail to honor their obligations under these arrangements. In
addition, these arrangements may not be effective in reducing the
Company’s exposure to changes in interest rates. When the Company
uses forward-starting interest rate swaps, there is a risk that it
will not complete the long-term borrowing against which the swap is
intended to hedge. If such events occur, the Company’s consolidated
financial condition and results of operations may be adversely
affected. See Note 11 to the Consolidated Financial Statements for
additional information on the Company's interest rate
swaps.
The Company has entered into joint venture agreements that limit
its flexibility with respect to jointly owned properties and
expects to enter into additional such agreements in the
future.
As of December 31, 2022, the Company had investments of $327.2
million in unconsolidated joint ventures with unrelated third
parties comprised of 33 properties and two parking garages. The
Company may acquire, develop, or
redevelop additional properties in joint ventures with unrelated
third parties. In such investments, the Company is subject to risks
that may not be present in its other forms of ownership,
including:
•joint
venture partners could have financing and investment goals or
strategies that are different than those of the Company, including
terms and strategies for such investment and what levels of debt
place on the venture;
•the
parties to a joint venture could reach an impasse on certain
decisions, which could result in unexpected costs, including costs
associated with litigation or arbitration;
•a
joint venture partner's actions might have the result of subjecting
the property or the Company to liabilities in excess of those
contemplated;
•joint
venture partners could have investments that are competitive with
the Company's properties in certain markets;
•interests
in joint ventures are often illiquid and the Company may have
difficulty exiting such an investment, or may have to exit at less
than fair market value;
•joint
venture partners may be structured differently than the Company for
tax purposes and there could be conflicts relating to the Company's
REIT status; and
•joint
venture partners could become insolvent, fail to fund capital
contributions, or otherwise fail to fulfill their obligations as a
partner, which could require the Company to invest more capital
into such ventures than anticipated.
The U.S. federal income tax treatment of the cash that the Company
might receive from cash settlement of a forward equity agreement is
unclear and could jeopardize the Company's ability to meet the REIT
qualification requirements.
In the event that we elect to settle any forward equity agreement
for cash and the settlement price is below the applicable forward
equity price, we would be entitled to receive a cash payment from
the relevant forward purchaser. Under Section 1032 of the Internal
Revenue Code, generally, no gains and losses are recognized by a
corporation in dealing in its own shares, including pursuant to a
"securities futures contract" (as defined in the Internal Revenue
Code, by reference to the Exchange Act). Although we believe that
any amount received by us in exchange for our stock would qualify
for the exemption under Section 1032 of the Internal Revenue Code,
because it is not entirely clear whether a forward equity agreement
qualifies as a "securities futures contract," the U.S. federal
income tax treatment of any cash settlement payment we receive is
uncertain. In the event that we recognize a significant gain from
the cash settlement of a forward equity agreement, we might be
unable to satisfy the gross income requirements applicable to REITs
under the Internal Revenue Code. In that case, we may be able to
rely upon the relief provisions under the Internal Revenue Code in
order to avoid the loss of our REIT status. Even if the relief
provisions apply, we will be subject to a 100% tax on the greater
of (i) the excess of 75% of our gross income (excluding gross
income from prohibited transactions) over the amount of such income
attributable to sources that qualify under the 75% test or (ii) the
excess of 95% of our gross income (excluding gross income from
prohibited transactions) over the amount of such gross income
attributable to sources that qualify under the 95% test, multiplied
in either case by a fraction intended to reflect our profitability.
In the event that these relief provisions were not available, we
could lose our REIT status under the Internal Revenue
Code.
In case of our bankruptcy or insolvency, any forward equity
agreements will automatically terminate, and the Company would not
receive the expected proceeds from any forward sale of shares of
its common stock.
If we file for or consent to a proceeding seeking a judgment in
bankruptcy or insolvency or any other relief under any bankruptcy
or insolvency law or other similar law affecting creditors’ rights,
or we or a regulatory authority with jurisdiction over us presents
a petition for our winding-up or liquidation, and we consent to
such a petition, any forward equity agreements that are then in
effect will automatically terminate. If any such forward equity
agreement so terminates under these circumstances, we would not be
obligated to deliver to the relevant forward purchaser any shares
of common stock not previously delivered, and the relevant forward
purchaser would be discharged from its obligation to pay the
applicable forward equity price per share in respect of any shares
of common stock not previously settled under the applicable forward
equity agreement. Therefore, to the extent that there are any
shares of common stock with respect to which any forward equity
agreement has not been settled at the time of the commencement of
any such bankruptcy or insolvency proceedings, we would not receive
the relevant forward equity price per share in respect of those
shares of common stock.
Risks relating to government regulations
The Company's property taxes could increase due to reassessment or
property tax rate changes.
Real property taxes on the Company's properties may increase as its
properties are reassessed by taxing authorities or as property tax
rates change. For example, a current California law commonly
referred to as
Proposition
13
generally limits annual real estate tax increases on California
properties to 2% of assessed value. Accordingly, the assessed value
and resulting property tax the Company pays is less than it would
be if the properties were assessed at current values. The Company
owns 39 properties in California, representing 11.1% of its total
revenue. From time to time, proposals have been made to reduce the
beneficial impact of
Proposition
13,
particularly with respect to commercial property, which would
include medical office buildings. Most recently, an initiative
qualified for California’s November 2020 statewide ballot that
would generally limit Proposition 13’s protections to residential
real estate. If this initiative had passed, it would have ended the
beneficial effect of
Proposition
13
for the Company's properties, and property tax expense could have
increase substantially, adversely affecting the Company's cash flow
from operations and net income. While this initiative did not pass,
the Company cannot predict whether other changes to
Proposition
13
may be proposed or adopted in the future.
Trends in the healthcare service industry may negatively affect the
demand for the Company’s properties, lease revenues and the values
of its investments.
The healthcare service industry may be affected by the
following:
•disruption
in patient volume and revenue from pandemics, such as
COVID-19;
•trends
in the method of delivery of healthcare services, such as
telehealth;
•transition
to value-based care and reimbursement of providers;
•competition
among healthcare providers;
•consolidation
among healthcare providers, health insurers, hospitals and health
systems;
•a
rise in government-funded health insurance coverage;
•pressure
on providers' operating profit margins from lower reimbursement
rates, lower admissions growth, and higher expense
growth;
•availability
of capital;
•credit
downgrades;
•liability
insurance expense;
•rising
pharmaceutical drug expense;
•regulatory
and government reimbursement uncertainty related to the Medicare
and Medicaid programs;
•a
trend toward government regulation of pharmaceutical
pricing;
•government
regulation of hospitals' and health insurers' pricing
transparency;
•federal
court decisions on cases challenging the legality of the Affordable
Care Act, in whole or in part;
•site-neutral
rate-setting for Medicare services across different care
settings;
•heightened
health information technology security standards and the meaningful
use of electronic health records by healthcare providers;
and
•potential
tax law changes affecting providers.
These trends, among others, can adversely affect the economic
performance of some or all of the tenants and, in turn, negatively
affect the lease revenues and the value of the Company’s property
investments.
The costs of complying with governmental laws and regulations may
adversely affect the Company's results of operations.
All real property and the operations conducted on real property are
subject to federal, state, and local laws and regulations relating
to environmental protection and human health and safety. Some of
these laws and regulations may impose joint and several liability
on tenants, owners, or operators for the costs to investigate or
remediate contaminated properties, regardless of fault or whether
the acts causing the contamination were legal. In addition, the
presence of hazardous substances, or the failure to properly
remediate these substances, may hinder the Company's ability to
sell, rent, or pledge such property as collateral for future
borrowings.
Compliance with new laws or regulations or stricter interpretation
of existing laws may require the Company to incur significant
expenditures. For example, proposed legislation to address climate
change could increase utility and other costs of operating the
Company's properties. Future laws or regulations may impose
significant environmental liability. Additionally, tenant or other
operations in the vicinity of the Company's properties, such as the
presence of underground storage tanks, or activities of unrelated
third parties may affect the Company's properties. There are
various local, state, and federal fire, health, life-safety, and
similar regulations with which the Company may be required to
comply and that may subject us to liability in the form of fines or
damages for noncompliance. Any expenditures, fines, or damages that
the Company must pay would adversely affect its results of
operations.
Discovery of previously undetected environmentally hazardous
conditions may adversely affect the Company's financial condition
and results of operations. Under various federal, state, and local
environmental laws and regulations, a current or previous property
owner or operator may be liable for the cost to remove or remediate
hazardous or toxic substances on such property. These costs could
be significant. Such laws often impose liability whether or not the
owner or operator knew of, or was responsible for, the presence of
such hazardous or toxic substances. Environmental laws also may
impose restrictions on the manner in which property may be used or
businesses may be operated, and these restrictions may require
significant expenditures or prevent the Company from entering into
leases with prospective tenants that may be impacted by such laws.
Environmental laws provide for sanctions for noncompliance and may
be enforced by governmental agencies or private parties. Certain
environmental laws and common law principles could be used to
impose liability for release of and exposure to hazardous
substances, including asbestos-containing materials. Third parties
may seek recovery from real property owners or operators for
personal injury or property damage associated with exposure to
released hazardous substances. The cost of defending against claims
of liability, of complying with environmental regulatory
requirements, of remediating any contaminated property, or of
paying personal injury claims could adversely affect the Company's
financial condition and results of operations.
Qualifying as a REIT involves highly technical and complex
provisions of the Internal Revenue Code.
Qualification as a REIT involves the application of highly
technical and complex provisions of the Internal Revenue Code for
which only limited judicial and administrative authorities exist.
Even a technical or inadvertent violation could jeopardize the
Company’s REIT qualification. The Company’s continued qualification
as a REIT will depend on the Company’s satisfaction of certain
asset, income, organizational, distribution, stockholder ownership
and other requirements on a continuing basis. In addition, the
Company’s ability to satisfy the requirements to qualify as a REIT
depends in part on the actions of third parties over which the
Company has no control or only limited influence, including in
cases where the Company owns an equity interest in an entity that
is classified as a partnership for U.S. federal income tax
purposes.
If the Company fails to remain qualified as a REIT, the Company
will be subject to significant adverse consequences, including
adversely affecting the value of its common stock.
The Company intends to operate in a manner that will allow it to
continue to qualify as a REIT for federal income tax purposes.
Although the Company believes that it qualifies as a REIT, it
cannot provide any assurance that it will continue to qualify as a
REIT for federal income tax purposes. The Company’s continued
qualification as a REIT will depend on the satisfaction of certain
asset, income, organizational, distribution, stockholder ownership
and other requirements on a continuing basis. The Company’s ability
to satisfy the asset tests depends upon the characterization and
fair market values of its assets. The Company’s compliance with the
REIT income and quarterly asset requirements also depends upon the
Company’s ability to successfully manage the composition of the
Company’s income and assets on an ongoing basis. Accordingly, there
can be no assurance that the Internal Revenue Service (“IRS”) will
not contend that the Company has operated in a manner that violates
any of the REIT requirements.
If the Company were to fail to qualify as a REIT in any taxable
year, the Company would be subject to federal income tax on its
taxable income at regular corporate rates and possibly increased
state and local taxes (and the Company might need to borrow money
or sell assets in order to pay any such tax). Further, dividends
paid to the Company’s stockholders would not be deductible by the
Company in computing its taxable income. Any resulting corporate
tax liability could be substantial and would reduce the amount of
cash available for distribution to the Company’s stockholders,
which in turn could have an adverse impact on the value of, and
trading prices for, the Company’s
common stock. In addition, in such event the Company would no
longer be required to pay dividends to maintain REIT status, which
could adversely affect the value of the Company’s common stock.
Unless the Company were entitled to relief under certain provisions
of the Internal Revenue Code, the Company also would continue to be
disqualified from taxation as a REIT for the four taxable years
following the year in which the Company failed to qualify as a
REIT.
Even if the Company remains qualified for taxation as a REIT, the
Company is subject to certain federal, state and local taxes on its
income and assets, including taxes on any undistributed taxable
income, and state or local income, franchise, property and transfer
taxes. These tax liabilities would reduce the Company’s cash flow
and could adversely affect the value of the Company’s common stock.
For more specific information on state income taxes paid, see Note
16 to the Consolidated Financial Statements.
The Company’s articles of incorporation, as well as provisions of
the Maryland General Corporation Law ("MGCL"), contain limits and
restrictions on transferability of the Company’s common stock which
may have adverse effects on the value of the Company’s common
stock.
In order to qualify as a REIT, no more than 50% of the value of the
Company’s outstanding shares may be owned, directly or indirectly,
by five or fewer individuals (as defined in the Internal Revenue
Code to include certain entities) during the last half of a taxable
year. To assist in complying with this REIT requirement, the
Company’s articles of incorporation contain provisions restricting
share transfers where the transferee would, after such transfer,
own more than 9.8% either in number or value of the outstanding
stock of the Company. If, despite this prohibition, stock is
acquired increasing a transferee’s ownership to over 9.8% in value
of the outstanding stock, the stock in excess of this 9.8% in value
is deemed to be held in trust for transfer at a price that does not
exceed what the purported transferee paid for the stock, and, while
held in trust, the stock is not entitled to receive dividends or to
vote. In addition, under these circumstances, the Company has the
right to redeem such stock.
In addition, certain provisions of the MGCL applicable to the
Company may have the effect of inhibiting or deterring a third
party from making a proposal to acquire the Company or of delaying
or preventing a change of control under circumstances that
otherwise could provide Company stockholders with the opportunity
to realize a premium over the then-prevailing market price of such
shares, including:
•provisions
under Subtitle 8 of Title 3 of the MGCL that permit the Board of
Directors, without stockholders’ approval and regardless of what is
currently provided in the Company's Articles of Incorporation or
bylaws, to implement certain takeover defenses;
•“business
combination” provisions that, subject to limitations, prohibit
certain business combinations, asset transfers and equity security
issuances or reclassifications between the Company and an
“interested stockholder” (defined generally as any person who
beneficially owns, directly or indirectly, 10% or more of the
voting power of the Company's outstanding voting stock or an
affiliate or associate of the Company who, at any time within the
two-year period immediately prior to the date in question, was the
beneficial owner, directly or indirectly, of 10% or more of the
Company's then outstanding stock) or an affiliate of an interested
stockholder for five years after the most recent date on which the
stockholder becomes an interested stockholder, and thereafter may
impose supermajority voting requirements unless certain minimum
price conditions are satisfied; and
•“control
share” provisions that provide that holders of “control shares” of
the Company (defined as shares which, when aggregated with other
shares controlled by the stockholder, entitle the stockholder to
exercise one of three increasing ranges of voting power in electing
directors) acquired in a “control share acquisition” (defined as
the direct or indirect acquisition of ownership or control of
issued and outstanding “control shares”) have no voting rights
except to the extent approved by Company stockholders by the
affirmative vote of at least two-thirds of all the votes entitled
to be cast on the matter, excluding all interested
shares.
Pursuant to a resolution adopted by the Board of Directors, the
Company is prohibited from classifying the Board under Subtitle 8
unless stockholders entitled to vote generally in the election of
directors approve a proposal to repeal such resolution by the
affirmative of a majority of the votes cast on the matter. In the
case of the business combination provisions of the MGCL, the Board
of Directors has adopted a resolution providing that any
business
combination between the Company and any other person is exempted
from this statute, provided that such business combination is first
approved by the Board of Directors. This resolution, however, may
be altered or repealed in whole or in part at any time. In the case
of the control share provisions of the MGCL, the Company has opted
out of these provisions pursuant to a provision in its bylaws. The
Company may, however, by amendment to its bylaws, opt in to the
control share provisions of the MGCL. The Company may also choose
to adopt other takeover defenses in the future. Any such actions
could deter a transaction that may otherwise be in the interest of
Company stockholders.
These restrictions on transfer of the Company’s shares could have
adverse effects on the value of the Company’s common
stock.
Complying with the REIT requirements may cause the Company to
forego otherwise attractive opportunities.
To qualify as a REIT for federal income tax purposes, the Company
must continually satisfy tests concerning, among other things, the
sources of its income, the nature of its assets, the amounts it
distributes to its stockholders and the ownership of its stock. The
Company may be unable to pursue investments that would be otherwise
advantageous to the Company in order to satisfy the
source-of-income or distribution requirements for qualifying as a
REIT. Thus, compliance with the REIT requirements may hinder the
Company’s ability to make certain attractive
investments.
The prohibited transactions tax may limit the Company's ability to
sell properties.
A REIT's net gain from prohibited transactions is subject to a 100%
tax. In general, prohibited transactions are sales or other
dispositions of property held primarily for sale to customers in
the ordinary course of business. The Company may be subject to the
prohibited transaction tax equal to 100% of net gain upon a
disposition of real property. Although a safe harbor to the
characterization of the sale of real property by a REIT as a
prohibited transaction is available, there can be no assurance that
the Company can comply in all cases with the safe harbor or that it
will avoid owning property that may be characterized as held
primarily for sale to customers in the ordinary course of business.
Consequently, the Company may choose not to engage in certain sales
of its properties or may conduct such sales through a taxable REIT
subsidiary, which would be subject to federal and state income
taxation.
New legislation or administrative or judicial action, in each
instance potentially with retroactive effect, could make it more
difficult or impossible for the Company to qualify as a
REIT.
The present federal income tax treatment of REITs may be modified,
possibly with retroactive effect, by legislative, judicial or
administrative action at any time, which could affect the federal
income tax treatment of an investment in the Company. The federal
income tax rules that affect REITs are constantly under review by
persons involved in the legislative process, the IRS and the U.S.
Treasury Department, which results in statutory changes as well as
frequent revisions to regulations and interpretations. Revisions in
federal tax laws and interpretations thereof could cause the
Company to change its investments and commitments and affect the
tax considerations of an investment in the Company. There can be no
assurance that new legislation, regulations, administrative
interpretations or court decisions will not change the tax laws
significantly with respect to the Company’s qualification as a REIT
or with respect to the federal income tax consequences of
qualification.
New and increased transfer tax rates may reduce the value of the
Company’s properties.
In recent years, several cities in which the Company owns assets
have increased transfer tax rates. These include Boston, Los
Angeles, San Francisco, Seattle, and Washington, D.C. In 2022, Los
Angeles increased its transfer tax rate from 0.45% to 5.5% on sales
of real properties greater than $10 million in value, effective
April 1, 2023. In 2020, San Francisco increased it transfer tax
rate to 6% for sales in excess of $25 million in value. Also in
2020, the State of Washington increased its transfer tax rate from
1.28% to 3% on sales in excess of $3 million in value; the combined
state and local transfer tax rate in Seattle/King County,
Washington is 3.5% on sales above $3 million. As state and
municipal governments seek new ways to raise revenue, other
jurisdictions may implement new real estate transfer taxes or
increase existing transfer tax rates. Increases in such tax rates
can impose significant additional transaction costs on sales of
commercial real estate and may reduce the value of the Company’s
properties at sale by the amount of the new or increased
tax.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
In addition to the properties described in Item 1. “Business,”
in Note 3 to the Consolidated Financial Statements, and in Schedule
III of Item 15 of this Annual Report on Form 10-K, the Company
leases office space from unrelated third parties from time to time.
The Company owns its corporate headquarters located at 3310 West
End Avenue in Nashville, Tennessee and a corporate office in
Charleston, South Carolina.
Item 3. Legal Proceedings
The Company is not aware of any pending or threatened litigation
that, if resolved against the Company, would have a material
adverse effect on the Company's consolidated financial position,
results of operations, or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
Shares of the Company’s common stock are traded under the symbol
“HR.” At December 31, 2022, there were 2,457 stockholders of
record.
Future dividends will be declared and paid at the discretion of the
Board of Directors. The Company’s ability to pay dividends is
dependent upon its ability to generate funds from operations and
cash flows, and to make accretive new investments.
Equity Compensation Plan Information
The following table provides information as of December 31,
2022 about the Company’s common stock that may be issued as
restricted stock and upon the exercise of options, warrants and
rights under all of the Company’s existing compensation plans,
including the Amended and Restated 2006 Incentive
Plan.
|
|
|
|
|
|
|
|
|
|
|
|
PLAN CATEGORY |
NUMBER OF SECURITIES
TO BE ISSUED
upon exercise of outstanding options, warrants, and rights
1
|
WEIGHTED AVERAGE EXERCISE PRICE
of outstanding options, warrants, and rights
1
|
NUMBER OF SECURITIES REMAINING AVAILABLE
for future issuance under equity
compensation plans (excluding
securities reflected in the first column) |
Equity compensation plans approved by security holders |
340,976 |
|
— |
|
9,214,187 |
|
Equity compensation plans not approved by security
holders |
— |
|
— |
|
— |
|
Total |
340,976 |
|
— |
|
9,214,187 |
|
1The
outstanding options relate only to Legacy HR's 2000 Employee Stock
Purchase Plan (the "Legacy HR Employee Stock Purchase Plan"), which
was terminated in
November
2022. No new options will be issued under the Legacy HR Employee
Stock Purchase Plan and existing options will expire in March 2024.
The Company is unable to ascertain with specificity the number of
securities to be issued upon exercise of outstanding rights under
the Legacy HR Employee Stock Purchase Plan or the weighted average
exercise price of outstanding rights under that plan. The Legacy HR
Employee Stock Purchase Plan provides that shares of common stock
may be purchased at a per share price equal to 85% of the fair
market value of the common stock at the beginning of the offering
period or a purchase date applicable to such offering period,
whichever is lower.
Issuer Purchases of Equity Securities
During the year ended December 31, 2022, the Company withheld
and canceled shares of Company common stock to satisfy employee tax
withholding obligations payable upon the vesting of non-vested
shares, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PERIOD |
TOTAL NUMBER OF SHARES PURCHASED |
AVERAGE PRICE PAID
per share |
TOTAL NUMBER OF SHARES purchased as part of publicly announced
plans or programs |
MAXIMUM NUMBER OF SHARES
that may yet be purchased
under the plans or programs |
January 1 - January 31 |
— |
|
$ |
— |
|
— |
|
— |
|
February 1 - February 28 |
6,727 |
|
30.67 |
|
— |
|
— |
|
March 1 - March 31 |
— |
|
— |
|
— |
|
— |
|
April 1 - April 30 |
— |
|
— |
|
— |
|
— |
|
May 1 - May 31 |
— |
|
— |
|
— |
|
— |
|
June 1 - June 30 |
— |
|
— |
|
— |
|
— |
|
July 1 - July 31 |
— |
|
— |
|
— |
|
— |
|
August 1 - August 31 |
— |
|
— |
|
— |
|
— |
|
September 1 - September 30 |
2,018 |
|
24.14 |
|
— |
|
— |
|
October 1 - October 31 |
— |
|
— |
|
— |
|
— |
|
November 1 - November 30 |
— |
|
— |
|
— |
|
— |
|
December 1 - December 31 |
129,147 |
|
19.37 |
|
— |
|
— |
|
Total |
137,892 |
|
|
|
|
Authorization to Repurchase Common Stock
On August 2, 2022, the Company’s Board of Directors authorized the
repurchase of up to $500 million of outstanding shares of the
Company’s common stock either in the open market or through
privately negotiated transactions, subject to market conditions,
regulatory constraints, and other customary conditions. The Company
is not obligated under this authorization to repurchase any
specific number of shares. This authorization supersedes all
previous stock repurchase authorizations. As of the date of this
report, the Company has not repurchased any shares of its common
stock under this authorization.
Stock Performance Graph
The following graph provides a comparison of the Company's
cumulative total shareholder return with the Russell 3000 Index and
cumulative total returns of FTSE NAREIT All Equity REITs Index for
the period from December 31, 2017 through December 31, 2022. The
comparison assumes $100 was invested on December 31, 2017 in the
Company's common stock and in each of the indexes and assumes
reinvestment of dividends, as applicable. The Company's data for
periods prior to the closing of the Merger is the stock performance
of Legacy HR.
Item 6. [Reserved]
Item 7. 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 SEC, as well as information included in oral statements or
other written statements made, or to be made, by senior management
of the Company, contain, or will contain, disclosures that are
“forward-looking statements.” Forward-looking statements include
all statements that do not relate solely to historical or current
facts and can be identified by the use of words such as “may,”
“will,” “expect,” “believe,” “anticipate,” “target,” “intend,”
“plan,” “estimate,” “project,” “continue,” “should,” “could” and
other comparable terms. These forward-looking statements are based
on the current plans and expectations of management and are subject
to a number of risks and uncertainties that could materially affect
the Company’s current plans and expectations and future financial
condition and results.
Such risks and uncertainties as more fully discussed in Item 1A
“Risk Factors” of this report and in other reports filed by the
Company with the SEC from time to time include, among other things,
the following:
Merger and Integration Risks
•The
Company incurred substantial expenses related to the
Merger;
•The
Company may be unable to integrate the businesses of Legacy HR and
Legacy HTA successfully and realize the anticipated synergies and
related benefits of the Merger or do so within the anticipated
timeframe;
•The
Company may be unable to retain key employees;
•The
trading price of shares of common stock of the Company may be
affected by factors different from those that affected the price of
shares of Legacy HR's common stock or Legacy HTA’s common stock
before the Merger; and
•The
Company cannot assure you that it will be able to continue paying
dividends at or above the rates paid by Legacy HR and Legacy
HTA.
Risk relating to our business and operations
•The
Company's expected results may not be achieved;
•The
Company’s revenues depend on the ability of its tenants under its
leases to generate sufficient income from their operations to make
rental payments to the Company;
•Pandemics,
such as COVID-19 and other pandemics that may occur in the future,
and measures intended to prevent their spread or mitigate their
severity could have a material adverse effect on the Company's
business, results of operations, cash flows and financial
condition;
•Owning
real estate and indirect interests in real estate is subject to
inherent risks;
•The
Company may incur impairment charges on its real estate properties
or other assets;
•The
Company has properties subject to purchase options that expose it
to reinvestment risk and reduction in expected investment
returns;
•If
the Company is unable to promptly re-let its properties, if the
rates upon such re-letting are significantly lower than the
previous rates or if the Company is required to undertake
significant expenditures or make significant leasing concessions to
attract new tenants, then the Company’s business, consolidated
financial condition and results of operations would be adversely
affected;
•Certain
of the Company’s properties are special purpose healthcare
facilities and may not be easily adaptable to other
uses;
•The
Company has, and in the future may have more, exposure to fixed
rent escalators, which could lag behind inflation and the growth in
operating expenses such as real estate taxes, utilities, insurance,
and maintenance expense;
•The
Company’s real estate investments are illiquid and the Company may
not be able to sell properties strategically targeted for
disposition;
•The
Company is subject to risks associated with the development and
redevelopment of properties;
•The
Company may make material acquisitions and undertake developments
and redevelopments that may involve the expenditure of significant
funds and may not perform in accordance with management’s
expectations;
•The
Company is exposed to risks associated with geographic
concentration;
•Many
of the Company’s leases are dependent on the viability of
associated health systems. Revenue concentrations relating to these
leases expose the Company to risks related to the financial
condition of the associated health systems;
•Many
of the Company’s properties are held under ground leases. These
ground leases contain provisions that may limit the Company’s
ability to lease, sell, or finance these properties;
•The
Company may experience uninsured or underinsured
losses;
•Damage
from catastrophic weather and other natural events, whether caused
by climate change or otherwise, could result in losses to the
Company; and
•The
Company faces risks associated with security breaches through cyber
attacks, cyber intrusions, or otherwise, as well as other
significant disruptions of its information technology networks and
related systems.
Risks relating to our capital structure and financings
•The
Company has incurred significant debt obligations and may incur
additional debt and increase leverage in the future;
•Covenants
in the Company’s debt instruments limit its operational
flexibility, and a breach of these covenants could materially
affect the Company’s consolidated financial condition and results
of operations;
•If
lenders under the Unsecured Credit Facility fail to meet their
funding commitments, the Company’s operations and consolidated
financial position would be negatively impacted;
•The
unavailability of equity and debt capital, volatility in the credit
markets, increases in interest rates, or changes in the Company’s
debt ratings could have an adverse effect on the Company’s ability
to meet its debt payments, make dividend payments to stockholders
or engage in acquisition and development activity;
•Increases
in interest rates could have a material adverse effect on the
Company's cost of capital;
•The
Company's swap agreements may not effectively reduce its exposure
to changes in interest rates;
•The
Company has entered into joint venture agreements that limit its
flexibility with respect to jointly owned properties and expects to
enter into additional such agreements in the future;
•The
U.S. federal income tax treatment of the cash that the Company
might receive from cash settlement of a forward equity agreement is
unclear and could jeopardize the Company's ability to meet the REIT
qualification requirements; and
•In
case of our bankruptcy or insolvency, any forward equity agreements
will automatically terminate, and the Company would not receive the
expected proceeds from any forward sale of shares of its common
stock.
Risks relating to government regulations
•The
Company's property taxes could increase due to reassessment or
property tax rate changes;
•Trends
in the healthcare service industry may negatively affect the demand
for the Company’s properties, lease revenues and the values of its
investments;
•The
costs of complying with governmental laws and regulations may
adversely affect the Company's results of operations;
•Qualifying
as a REIT involves highly technical and complex provisions of the
Internal Revenue Code;
•If
the Company fails to remain qualified as a REIT, the Company will
be subject to significant adverse consequences, including adversely
affecting the value of its common stock;
•The
Company’s articles of incorporation, as well as provisions of the
Maryland General Corporation Law ("MGCL"), contain limits and
restrictions on transferability of the Company’s common stock which
may have adverse effects on the value of the Company’s common
stock;
•Complying
with the REIT requirements may cause the Company to forego
otherwise attractive opportunities;
•The
prohibited transactions tax may limit the Company's ability to sell
properties;
•New
legislation or administrative or judicial action, in each instance
potentially with retroactive effect, could make it more difficult
or impossible for the Company to qualify as a REIT;
and
•New
and increased transfer tax rates may reduce the value of the
Company’s properties.
The Company undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new
information, future events or otherwise. Stockholders and investors
are cautioned not to unduly rely on such forward-looking statements
when evaluating the information presented in the Company’s filings
and reports, including, without limitation, estimates and
projections regarding the performance of development projects the
Company is pursuing.
Overview
The Company owns and operates properties that facilitate the
delivery of healthcare services in primarily outpatient settings.
To execute its strategy, the Company engages in a broad spectrum of
integrated services including leasing, management, acquisition,
financing, development and redevelopment of such properties. The
Company seeks to generate stable, growing income and lower the
long-term risk profile of its portfolio of properties by focusing
on facilities primarily located on or near the campuses of acute
care hospitals associated with leading health systems. The Company
seeks to reduce financial and operational risk by owning properties
in high-growth markets with a broad tenant mix that includes over
30 physician specialties, as well as surgery, imaging, cancer, and
diagnostic centers.
As described in the Explanatory Note above and elsewhere in this
report, on July 20, 2022, Legacy HR and Legacy HTA completed a
merger between the companies in which Legacy HR merged with and
into a wholly-owned subsidiary of Legacy HTA, with Legacy HR
continuing as the surviving entity and a wholly-owned subsidiary of
Legacy HTA. Immediately following the Merger, Legacy HTA changed
its name to “Healthcare Realty Trust Incorporated.” For accounting
purposes, the Merger was treated as a “reverse acquisition” in
which Legacy HR was considered the acquirer. Accordingly, the
information discussed in this section reflects, for periods prior
to the closing of the Merger, the financial condition and results
of operations of Legacy HR, and for periods from the closing of the
Merger, that of the consolidated company.
This section is organized in the following sections:
•Liquidity
and Capital Resources
•Trends
and Matters Impacting Operating Results
•Results
of Operations
•Non-GAAP
Financial Measures and Key Performance Indicators
•Application
of Critical Accounting Policies to Accounting
Estimates
Liquidity and Capital Resources
The Company monitors its liquidity and capital resources and
considers several indicators in its assessment of capital markets
for financing acquisitions and other operating activities. The
Company considers, among other factors, its leverage ratios and
lending covenants, dividend payout percentages, interest rates,
underlying treasury rate, debt market spreads and cost of equity
capital to compare its operations to its peers and to help identify
areas in which the Company may need to focus its
attention.
Sources and Uses of Cash
The Company's revenues are derived from its real estate property
portfolio based on contractual arrangements with its tenants. These
sources of revenue represent the Company's primary source of
liquidity to fund its dividends and its operating expenses,
including interest incurred on debt, principal payments on debt,
general and administrative costs, capital expenditures and other
expenses incurred in connection with managing its existing
portfolio and investing in additional properties. To the extent
additional investments are not funded by these sources, the Company
will fund its investment activity generally through equity or debt
issuances either in the public or private markets, property
dispositions or through proceeds from the Unsecured Credit
Facility.
The Company expects to continue to meet its liquidity needs,
including capital for additional investments, tenant improvement
allowances, operating and finance lease payments, paying dividends,
and funding debt service, through
cash on hand, cash flows from operations and the cash flow sources
addressed above. See Note 4 to the Consolidated Financial
Statements for additional discussion of operating and financing
lease payment obligations. See "Trends and Matters Impacting
Operating Results" for additional information regarding the
Company's sources and uses of cash.
Dividends paid by the Company for the year ended December 31,
2022 were funded from cash flows from operations and the Unsecured
Credit Facility, as cash flows from operations were not adequate to
fully fund dividends, primarily as a result of merger-related costs
paid during 2022. The Company expects that cash flows from property
operations will generate sufficient cash flows such that dividends
for the full year 2023 can be funded by cash flows from operations
or other sources of liquidity described above.
The Company also had unencumbered real estate assets with a gross
book value of approximately $13.8 billion at December 31,
2022, of which a portion could serve as collateral for secured
mortgage financing. The Company believes that its liquidity and
sources of capital are adequate to satisfy its cash requirements.
The Company cannot, however, be certain that these sources of funds
will be available at a time and upon terms acceptable to the
Company in sufficient amounts to meet its liquidity
needs.
The Company has exposure to variable interest rates and its common
stock price is impacted by the volatility in the stock markets.
However, the Company’s leases, which provide its main source of
income and cash flow, have terms of approximately one to 20 years
and have lease rates that generally increase on an annual basis at
fixed rates or based on consumer price indices.
Operating Activities
Cash flows provided by operating activities for the two years ended
December 31, 2022 and 2021 were $272.7 million and $232.6
million, respectively. Several items impact cash flows from
operating activities including, but not limited to, cash generated
from property operations, merger-related costs, interest payments
and the timing related to the payment of invoices and other
expenses and receipt of tenant rent.
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 consolidated results of
operations and cash flows could be adversely affected.
See "Trends and Matters Impacting Operating Results" for additional
information regarding the Company's operating
activities.
Investing Activities
A summary of the significant transactions impacting investing
activities for the twelve months ended December 31, 2022 is
listed below. See Note 5 to the Consolidated Financial Statements
for more detail on these activities.
The following table details the acquisitions for the year ended
December 31, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in thousands |
ASSOCIATED HEALTH SYSTEM/TENANCY
1
|
DATE ACQUIRED |
PURCHASE PRICE |
SQUARE FOOTAGE |
MILES TO CAMPUS |
Dallas, TX
2
|
Texas Health Resources |
2/11/2022 |
$ |
8,175 |
|
18,000 |
0.19 |
San Francisco, CA
3
|
Kaiser/Sutter Health |
3/7/2022 |
114,000 |
|
166,396 |
0.90 to 3.30 |
Atlanta, GA |
Wellstar Health |
4/7/2022 |
6,912 |
|
21,535 |
0.00 |
Denver, CO |
Centura Health |
4/13/2022 |
6,320 |
|
12,207 |
2.40 |
Colorado Springs, CO
4
|
Centura Health |
4/13/2022 |
13,680 |
|
25,800 |
0.80 to 1.70 |
Seattle, WA |
UW Medicine |
4/28/2022 |
8,350 |
|
13,256 |
0.05 |
Houston, TX |
CommonSpirit |
4/28/2022 |
36,250 |
|
76,781 |
1.70 |
Los Angeles, CA |
Cedars-Sinai Health Systems |
4/29/2022 |
35,000 |
|
34,282 |
0.11 |
Oklahoma, OK |
Mercy Health |
4/29/2022 |
11,100 |
|
34,944 |
0.18 |
Raleigh, NC
3
|
WakeMed/None |
5/31/2022 |
27,500 |
|
85,113 |
0.25 to 12.30 |
Tampa. FL
4
|
BayCare Health |
6/9/2022 |
18,650 |
|
55,788 |
0.23 |
Seattle, WA |
Evergreen Health |
8/1/2022 |
4,850 |
|
10,593 |
0.24 |
Raleigh, NC |
WakeMed Health |
8/9/2022 |
3,783 |
|
11,345 |
0.24 |
Jacksonville, FL |
Ascension Health |
8/9/2022 |
18,195 |
|
34,133 |
0.03 |
Atlanta, GA |
Wellstar Health |
8/10/2022 |
11,800 |
|
43,496 |
0.11 |
Denver, CO |
Centura Health |
8/11/2022 |
14,800 |
|
34,785 |
2.10 |
Raleigh, NC |
Duke Health |
8/18/2022 |
11,375 |
|
31,318 |
0.19 |
Nashville, TN |
Ascension Health |
9/15/2022 |
21,000 |
|
61,932 |
0.80 |
Austin, TX |
HCA Healthcare |
9/29/2022 |
5,450 |
|
15,000 |
0.03 |
Jacksonville, FL
2
|
Ascension Health |
10/12/2022 |
3,600 |
|
6,200 |
0.10 |
Houston, TX |
Memorial Hermann Health |
11/21/2022 |
5,500 |
|
28,369 |
0.00 |
Austin, TX
5
|
Ascension Health |
12/28/2022 |
888 |
|
2,219 |
0.01 |
Denver, CO |
None |
12/28/2022 |
16,400 |
|
39,692 |
3.01 |
|
|
|
|
|
|
Total investments in real estate |
|
$ |
403,578 |
|
863,184 |
|
|
1Includes
buildings located on-campus, adjacent and off-campus that are
anchored by healthcare systems or located within two miles of a
hospital campus.
2Represents
a single-tenant property.
3Includes
three properties.
4Includes
two properties.
5The
Company acquired additional ownership in an existing building
bringing the Company's ownership to 71.4%.
2022 Joint Venture Acquisitions
The following table details the joint venture acquisitions for the
year ended December 31, 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 |
3/7/2022 |
$ |
67,175 |
|
110,865 |
0.00 to 3.30 |
50 |
% |
Los Angeles, CA
3
|
Valley Presbyterian Health |
3/7/2022 |
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.
Capital Funding
In 2022, the Company funded $189.7 million toward the
following expenditures:
•$60.8 million
toward development and redevelopment of properties;
•$46.4
million toward first generation tenant improvements and planned
capital expenditures for acquisitions;
•$33.6
million toward second generation tenant improvements;
and
•$48.9
million toward capital expenditures.
See "Trends and Matters Impacting Operating Results" below for more
detail.
The following table details the dispositions for the year ended
December 31, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in thousands |
DATE
DISPOSED |
SALES PRICE |
SQUARE FOOTAGE |
Loveland, CO
1, 6
|
2/24/2022 |
$ |
84,950 |
|
150,291 |
San Antonio, TX
1
|
4/15/2022 |
25,500 |
|
201,523 |
|
GA, FL, PA
2
|
7/29/2022 |
133,100 |
|
316,739 |
|
GA, FL, TX
4
|
8/4/2022 |
160,917 |
|
343,545 |
|
Los Angeles, CA
2, 7
|
8/5/2022 |
134,845 |
|
283,780 |
|
Dallas, TX
4, 8
|
8/30/2022 |
114,290 |
|
189,385 |
|
Indianapolis, IN
3
|
8/31/2022 |
238,845 |
|
506,406 |
|
Dallas, TX
1
|
10/4/2022 |
104,025 |
|
291,328 |
|
Houston, TX |
10/21/2022 |
32,000 |
|
134,910 |
|
College Station, TX |
11/10/2022 |
49,177 |
|
122,942 |
|
El Paso, TX |
12/22/2022 |
55,326 |
|
110,465 |
|
Atlanta, GA
5
|
12/22/2022 |
91,243 |
|
348,416 |
|
St. Louis, MO |
12/28/2022 |
18,000 |
|
69,394 |
|
|
|
|
|
Total dispositions |
$ |
1,242,218 |
|
3,069,124 |
|
1Includes
two properties.
2Includes
four properties.
3Includes
five properties.
4Includes
six properties.
5Includes
nine properties.
6The
Company deferred the tax gain through a 1031 exchange and
reinvested the proceeds.
7Values
and square feet are represented at 100%. The Company retained a 20%
ownership interest in the joint venture that purchased these
properties.
8Values
and square feet are represented at 100%. The Company retained a 40%
ownership interest in the joint venture that purchased these
properties.
Subsequent Dispositions
On January 12, 2023, the Company disposed of two medical office
buildings, one in Tampa, Florida and one in Miami, Florida, with a
combined total of 224,037 square feet for an aggregate purchase
price of $93.3 million.
On January 30, 2023, the Company disposed of a 36,691 square foot
medical office building in Dallas, Texas for a purchase price of
$19.2 million. The Company retained a 40% ownership interest in the
joint venture that purchased this property.
On February 10, 2023, the Company disposed of a 6,500 square foot
medical office building in St. Louis, Missouri for a purchase price
of $0.4 million.
Financing Activities
Common Stock Issuances
The Company has in place an at-the-market ("ATM") equity offering
program to sell shares of the Company’s common stock from time to
time in at-the-market sales transactions. The Company has equity
distribution agreements with various sales agents with respect to
the ATM offering program with an aggregate sales amount of up to
$750.0 million. As of December 31, 2022, $750.0 million remained
available for issuance under the current ATM offering program.
Legacy HR's ATM agreements are no longer in effect following the
Merger on July 20, 2022. All of the activity in the following table
was conducted pre-merger under the Legacy HR at-the-market
program:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SALE PRICE
per share |
SHARES PRICED |
SHARES SETTLED |
SHARES REMAINING TO BE SETTLED |
NET PROCEEDS
in millions |
2022 |
$ |
31.73 |
|
— |
|
727,400 |
|
— |
|
$ |
22.3 |
|
|
|
|
|
|
|
Debt Activity
Below is a summary of the significant debt financing activity for
the twelve months ended December 31, 2022. See Note 10 to the
Consolidated Financial Statements for additional information on
financing activities.
Mortgage Payoffs
The following table details the mortgage note repayment activity
for the twelve months ended December 31, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
TRANSACTION DATE |
PRINCIPAL REPAYMENT |
ENCUMBERED SQUARE FEET |
CONTRACTUAL INTEREST RATE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments in full: |
|
|
|
|
Los Angeles, CA |
2/18/2022 |
$ |
(11.0) |
|
56,762 |
|
4.70 |
% |
Loveland, CO |
2/24/2022 |
(5.8) |
|
80,153 |
|
6.17 |
% |
|
|
$ |
(16.8) |
|
136,915 |
|
5.21 |
% |
|
|
|
|
|
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 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:
|
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|
|
|
|
|
|
|
|
|
|
COUPON |
|
PRINCIPAL OUTSTANDING AS OF |
Dollars in thousands |
FACE VALUE |
12/31/2022 |
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 “Unsecured
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 Unsecured 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 Unsecured 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.
•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 Unsecured 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 Unsecured 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 Unsecured 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 Unsecured Credit Facility, and the existing maturity in
June 2026 remains unchanged under the Unsecured 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 Unsecured Credit Facility. The Revolver currently matures in
October 2025, and the Unsecured 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 Unsecured Credit Facility and
was amended to conform to the terms of the Borrower’s other term
loan facilities under the Unsecured Credit Facility. The existing
maturity in October 2025 remains unchanged under the Unsecured
Credit Facility.
•Legacy
HTA’s and the OP’s existing $200.0 million term loan facility
was deemed continued pursuant to the Unsecured Credit Facility and
was amended to (a) conform to the terms of the Borrower’s other
term loan facilities under the Unsecured 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 Unsecured Credit Facility.
•The
Unsecured 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 December
31, 2022, the $350.0 million Unsecured 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 Unsecured 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 Unsecured Credit
Facility.
•The
Unsecured 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 Unsecured Credit
Facility, and the pricing for such term loan facility aligns with
the pricing for the Borrower’s other term loan facilities under the
Unsecured Credit Facility.
$1.125 Billion Asset Sale Term Loan
The Company completed its draw of the $1.125 billion asset sale
term loan on July 19, 2022. The principal balance as of September
30, 2022 was $423.0 million and was fully repaid on December 30,
2022.
Interest Rate Swaps
The Company has outstanding interest rate derivatives totaling $1.2
billion to hedge one-month 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 |
% |
January 15, 2024 |
200,000 |
|
1.21 |
% |
May 1, 2026 |
100,000 |
|
2.15 |
% |
December 1, 2026 |
150,000 |
|
3.84 |
% |
June 1, 2027 |
150,000 |
|
4.13 |
% |
December 1, 2027 |
250,000 |
|
3.79 |
% |
|
$ |
1,150,000 |
|
2.63 |
% |
On February 16, 2023, the Company entered into a swap transaction
with a notional amount of $50.0 million and a fixed rate of 4.16%.
The swap agreement has an effective date of March 1, 2023 and a
termination date of June 1, 2026.
The following table details the Company's debt balances as of
December 31, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRINCIPAL BALANCE |
CARRYING BALANCE
1
|
WEIGHTED YEARS TO MATURITY
2
|
CONTRACTUAL RATE |
EFFECTIVE RATE |
Senior Notes due 2025 |
$ |
250,000 |
|
$ |
249,115 |
|
2.3 |
|
3.88 |
% |
4.12 |
% |
Senior Notes due 2026
3
|
600,000 |
|
571,587 |
|
3.6 |
|
3.50 |
% |
4.94 |
% |
Senior Notes due 2027
3
|
500,000 |
|
479,553 |
|
4.5 |
|
3.75 |
% |
4.76 |
% |
Senior Notes due 2028 |
300,000 |
|
296,852 |
|
5.0 |
|
3.63 |
% |
3.85 |
% |
Senior Notes due 2030
3
|
650,000 |
|
565,402 |
|
7.1 |
|
3.10 |
% |
5.30 |
% |
Senior Notes due 2030
|
299,500 |
|
296,385 |
|
7.2 |
|
2.40 |
% |
2.72 |
% |
Senior Notes due 2031
|
300,000 |
|
295,547 |
|
8.2 |
|
2.05 |
% |
2.25 |
% |
Senior Notes due 2031
3
|
800,000 |
|
632,693 |
|
8.2 |
|
2.00 |
% |
5.13 |
% |
Total Senior Notes Outstanding |
3,699,500 |
|
3,387,134 |
|
5.9 |
|
2.97 |
% |
4.43 |
% |
$1.5 billion unsecured credit facility
4 5
|
385,000 |
|
385,000 |
|
4.8 |
|
SOFR + 0.95% |
5.27 |
% |
$350 million unsecured term loan
5
|
350,000 |
|
349,114 |
|
2.6 |
|
SOFR + 1.05% |
5.17 |
% |
$200 million unsecured term loan |
200,000 |
|
199,670 |
|
3.4 |
|
SOFR + 1.05% |
5.17 |
% |
$150 million unsecured term loan |
150,000 |
|
149,495 |
|
3.4 |
|
SOFR + 1.05% |
5.17 |
% |
$300 million unsecured term loan
3
|
300,000 |
|
299,936 |
|
3.8 |
|
SOFR + 1.05% |
5.17 |
% |
$200 million unsecured term loan
3
|
200,000 |
|
199,362 |
|
4.5 |
|
SOFR + 1.05% |
5.17 |
% |
$300 million unsecured term loan
5
|
300,000 |
|
297,869 |
|
5.0 |
|
SOFR + 1.05% |
5.17 |
% |
Mortgage notes payable |
84,122 |
|
84,247 |
|
2.0 |
|
4.07 |
% |
3.97 |
% |
Total Outstanding Notes and Bonds Payable |
$ |
5,668,622 |
|
$ |
5,351,827 |
|
5.0 |
|
3.72 |
% |
4.69 |
% |
1Balances
are reflected net of discounts and debt issuance costs and include
premiums.
2Includes
extension options.
3Debt
instruments assumed as part of the Merger with Legacy HTA on July
20, 2022. Amounts shown represent fair value
adjustments.
4As
of December 31, 2022, the Company had $385.0 million borrowed
under the Unsecured Credit Facility with a remaining borrowing
capacity of $1.1 billion.
5On
July 20, 2022, the Company entered into the Unsecured Credit
Facility which included a $1.5 billion revolving credit
facility, replacing Legacy HR's $700.0 million credit
facility.
Debt Covenant Information
The Company’s various debt agreements contain certain
representations, warranties, and financial and other covenants
customary in such debt agreements. Among other things, these
provisions require the Company to maintain certain financial ratios
and impose certain limits on the Company’s ability to incur
indebtedness and create liens or encumbrances. As of
December 31, 2022, the Company was in compliance with the
financial covenant provisions under all of its various debt
instruments.
As of December 31, 2022, 99.7% of the Company’s principal
balances were due after 2023, including extension options. Also, as
of December 31, 2022, the Company's incurrence of total debt
as defined in the senior notes due 2030 and 2031 [debt divided by
(total assets less intangibles and accounts receivable)] was
approximately 38.4% (cannot be greater than 60%) and debt service
coverage [interest expense divided by (net income plus interest
expense, taxes, depreciation and amortization, gains and
impairments)] was approximately 3.1 times (cannot be less than
1.5x).
The Company plans to manage its capital structure to maintain
compliance with its debt covenants consistent with its current
profile. Downgrades in ratings by the rating agencies could have a
material adverse impact on the Company’s cost and availability of
capital, which could in turn have a material adverse impact on
consolidated results of operations, liquidity and/or financial
condition.
Trends and Matters Impacting Operating Results
Management monitors factors and trends important to the Company and
the REIT industry in order to gauge their potential impact on the
operations of the Company. Discussed below are some of the factors
and trends that management believes may impact future operations of
the Company.
Acquisitions and Dispositions
In 2022, the Company invested in 33 medical office buildings
through acquisitions and investments in joint ventures. The total
purchase price of the acquisitions was $504.6 million and the
weighted average capitalization rate for these investments was
5.3%. The following bullets provide further detail of the 2022
acquisition activity.
•The
Company (exclusive of joint ventures) acquired 28 medical office
buildings for purchase prices totaling $403.6 million, resulting in
cash consideration paid of $399.2 million.
•Through
joint ventures, the Company acquired interests in five medical
office buildings for purchase prices totaling $101.0 million,
resulting in cash consideration paid of $99.2 million. The Company
funded 50% of the consideration for these
acquisitions.
The Company disposed of 44 properties in 2022 for sales prices
totaling $1.2 billion, including 10 properties contributed into
joint ventures in which the Company maintained a non-controlling
interest. These transactions yielded net cash proceeds of $1.1
billion, net of $45.7 million of closing costs and related
adjustments and $48.9 million of retained joint venture interests.
The weighted average capitalization rate for these properties was
4.8%. The Company calculates the capitalization rate for
dispositions as the in-place cash net operating income divided by
the sales price. The net proceeds of these sales was used to repay
the $1.125 billion asset sale term loan.
See the Company's discussion of the 2022 acquisition and
disposition activity in Note 5 to the Consolidated Financial
Statements.
Development and Redevelopment Activity
The table below details the Company’s development and redevelopment
activity as of December 31, 2022. The information included in
the table below represents management’s estimates and expectations
at December 31, 2022, which are subject to change. The
Company’s disclosures regarding certain projections or estimates of
completion dates may not reflect actual results.
|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESTIMATED REMAINING FUNDINGS |
ESTIMATED TOTAL INVESTMENT |
APPROXIMATE SQUARE FEET |
Dollars in thousands |
NUMBER OF PROPERTIES |
|
TOTAL FUNDED DURING THE YEAR |
TOTAL AMOUNT FUNDED |
|
|
|
|
|
|
|
Development Activity |
|
|
|
|
|
|
Nashville, TN |
1 |
|
|
$ |
23,513 |
|
$ |
25,359 |
|
$ |
18,641 |
|
$ |
44,000 |
|
106,194 |
|
Orlando, FL
1
|
2 |
|
|
9,477 |
|
16,633 |
|
$ |
48,367 |
|
65,000 |
|
156,566 |
|
Raleigh, NC |
1 |
|
|
4,807 |
|
13,625 |
|
$ |
35,675 |
|
49,300 |
|
120,694 |
|
Orlando, FL |
1 |
|
|
1,470 |
|
1,470 |
|
$ |
24,430 |
|
25,900 |
|
45,000 |
|
Total |
|
|
$ |
39,267 |
|
$ |
57,087 |
|
$ |
127,113 |
|
$ |
184,200 |
|
428,454 |
|
|
|
|
|
|
|
|
|
Redevelopment Activity |
|
|
|
|
|
|
Tacoma, WA |
1 |
|
|
$ |
7,930 |
|
$ |
12,253 |
|
$ |
247 |
|
$ |
12,500 |
|
56,000 |
|
Dallas, TX |
1 |
|
|
4,672 |
|
12,132 |
|
5,368 |
|
17,500 |
|
217,114 |
|
Washington, DC |
3 |
|
|
1,113 |
|
2,857 |
|
18,343 |
|
21,200 |
|
259,290 |
|
Total |
|
|
$ |
13,715 |
|
$ |
27,242 |
|
$ |
23,958 |
|
$ |
51,200 |
|
532,404 |
|
1This
project is funded through a construction note
receivable.
The Company funded an additional $7.8 million related to ongoing
tenant improvements at previously completed projects.
The Company is in the planning stages with several health systems
and developers regarding new development and redevelopment
opportunities and expects one or more to begin in 2023. Total costs
to develop or redevelop a typical medical office building can vary
depending on the scope of the project, market rental terms, parking
configuration, building amenities, asset type and geographic
location.
The Company’s disclosures regarding projections or estimates of
completion dates and leasing may not be indicative of actual
results.
Security Deposits and Letters of Credit
As of December 31, 2022, the Company held approximately $32.1
million in letters of credit and security deposits for the benefit
of the Company in the event the obligated tenant fails to perform
under the terms of its respective lease. Generally, the Company
may, at its discretion and upon notification to the tenant, draw
upon these instruments if there are any defaults under the
leases.
Expiring Leases
The Company expects that approximately 15% of the leases in its
portfolio will expire each year. In-place leases have a weighted
average lease term of 8.9 years and a weighted average remaining
lease term of 4.5 years. Demand for well-located real estate with
complementary practice types and services remains consistent, and
the Company's 2022 quarterly tenant retention statistics ranged
from 72% to 86%. In 2023, the Company has 1,446 leases totaling 4.3
million square feet in its multi-tenant portfolio that are
scheduled to expire. Of those leases, 73% are in on-campus
buildings, which, in our experience, tend to have high tenant
retention rates between 75% to 90%.
The Company continues to emphasize its contractual rent increases
for in-place leases. As of December 31, 2022 and 2021, the
Company's contractual rental rate growth averaged 2.68% and 2.87%
for in-place leases. In addition, the Company continued to see
strong quarterly weighted average rental rate growth for renewing
leases ("cash leasing spread") and expects the majority of its
renewal rates to increase between 3.0% and 4.0%. In 2022, for all
properties, including both Legacy HR and Legacy HTA, cash leasing
spreads averaged 3.3%.
In a further effort to maximize revenue growth and reduce its
exposure to key expenses such as taxes and utilities, the Company
carefully manages its balance of lease types. Gross leases, wherein
the Company has full exposure to all operating expenses, comprise
8% of its lease portfolio. Modified gross or base year leases, in
which the Company and tenant both pay a share of operating
expenses, comprise 27% of the Company's leased portfolio. Net
leases, in which tenants pay substantially all operating expenses,
total 58% of the leased portfolio. Absolute net leases, in which
tenants pay substantially all the building's operating and capital
expenses, comprise 7%.
Capital Expenditures
Capital expenditures are long-term investments made to maintain and
improve the physical and aesthetic attributes of the Company's
owned properties. Examples of such improvements include, but
are not limited to, material changes to, or the full replacement
of, major building systems (exterior facade, building
structure, roofs, elevators, mechanical systems,
electrical systems, energy management systems, upgrades to
existing systems for improved efficiency) and common area
improvements (furniture, signage and artwork, bathroom
fixtures and finishes, exterior landscaping, parking lots or
garages). These additions are capitalized into the gross
investment of a property and then depreciated over their estimated
useful lives, typically ranging
from 7 to 20 years. Capital expenditures
specifically do not include recurring maintenance expenses, whether
direct or indirect, related to the upkeep and maintenance of major
building systems or common area improvements. Capital
expenditures also do not include improvements related to a specific
tenant suite, unless the improvement is part of a major building
system or common area improvement.
The Company invested $48.9 million, or $1.21 per square
foot, in capital expenditures in 2022 and $19.6 million,
or $1.15 per square foot, in capital expenditures in 2021. As a
percentage of cash net operating income, 2022 and 2021 capital
expenditures were 8.5% and 6.1%, respectively. For a reconciliation
of cash net operating income, see "Same Store Cash NOI" in the
"Non-GAAP Financial Measures and Key Performance Indicators"
section as part of Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations included in Part II
of this report.
Tenant Improvements
The Company may invest in tenant improvements for the purpose of
refurbishing or renovating tenant space. The Company categorizes
these expenditures into first and second generation tenant
improvements. As of December 31, 2022, the Company had
commitments of approximately $195.1 million that are expected to be
spent on tenant improvements throughout the portfolio, excluding
development properties currently under construction.
First Generation Tenant Improvements & Planned Capital
Expenditures for Acquisitions
First generation tenant improvements and planned capital
expenditures for acquisition spending totaled $46.4 million and
$19.3 million for the years ended December 31, 2022 and 2021,
respectively. First generation tenant improvements include build
out costs related to suite space in shell condition. Planned
capital expenditures for acquisitions include expected near-term
fundings that were contemplated as part of the
acquisition.
Second Generation Tenant Improvements
Second generation tenant improvements spending totaled $33.6
million in 2022, or 5.8% of total cash net operating income. In
2021, this spending totaled $26.4 million, or 8.3% of total cash
net operating income.
If the cost of a tenant improvement project exceeds a tenant
improvement allowance, the Company generally offers the tenant the
option to finance the excess over the lease term with interest or
to reimburse the overage to the Company in a lump sum. In either
case, such overages are amortized by the Company as rental income
over the term of the lease. Interest earned on tenant overages is
included in other operating income in the Company's Consolidated
Statements of Income. The first and second generation tenant
overage amount amortized to rent, including interest, totaled
approximately $7.5 million in 2022, $5.9 million in 2021, and $6.6
million in 2020.
Second generation, multi-tenant tenant improvement commitments in
2022 for renewals averaged $1.76 per square foot per lease year,
ranging quarterly from $1.46 to $1.90. In 2021, these commitments
averaged $1.53 per square foot per lease year, ranging quarterly
from $1.27 to $1.87. In 2020, these commitments averaged $1.58 per
square foot per lease year, ranging quarterly from $1.48 to
$1.78.
Second generation, multi-tenant tenant improvement commitments in
2022 for new leases averaged $5.74 per square foot per lease year,
ranging quarterly from $4.84 to $7.07. In 2021, these commitments
averaged $5.39 per square foot per lease year, ranging quarterly
from $4.74 to $5.96. In 2020, these commitments averaged $5.52 per
square foot per lease year, ranging quarterly from $4.07 to
$6.40.
Leasing Commissions
In certain markets, the Company may pay leasing commissions to real
estate brokers who represent either the Company or prospective
tenants, with commissions generally equating to 4% to 6% of the
gross lease value for new leases and 2% to 4% of the gross lease
value for renewal leases. In addition, the Company pays its leasing
employees incentive compensation when leases are executed that meet
certain leasing thresholds. External leasing commissions are
amortized to property operating expense, and internal leasing costs
are amortized to general and administrative expense in the
Company's Consolidated Statements of Income. In 2022, the Company
paid leasing commissions of approximately $22.9 million, or $0.57
per square foot. In 2021, the Company paid leasing commissions of
approximately $11.7 million, or $0.69 per square foot. As a
percentage of total cash net operating income, leasing commissions
paid for 2022 and 2021 were 0.9% and 2.8%, respectively. The amount
of leasing commissions amortized over the term of the applicable
leases totaled $27.2 million, $8.5 million and $7.4 million for the
years ended December 31, 2022, 2021 and 2020,
respectively.
Rent Abatements
Rent abatements, which generally take the form of deferred rent,
are sometimes used to help induce a potential tenant to lease space
in the Company's properties. Such abatements, when made, are
amortized by the Company on a straight-line basis against rental
income over the lease term. Rent abatements for 2022 totaled
approximately $14.8 million, or $0.37 per square foot. Rent
abatements for 2021 totaled approximately $4.6 million, or $0.27
per square foot. Rent abatements for 2020 totaled approximately
$2.8 million, or $0.18 per square foot.
Single-Tenant Leases
As of December 31, 2022, the Company had a total of 141
single-tenant leases, with a weighted average lease term of 12.1
years and a weighted average remaining lease term of 5.6
years.
Thirteen single-tenant leases expire in 2023. Three of these have
been renewed. The Company is in negotiations with five of the
tenants and expects the leases to renew. One building was sold on
February 10, 2023. The remaining four leases are expected to be
sold or not renew during 2023.
Operating Leases
As of December 31, 2022, the Company was obligated to make
rental payments under operating lease agreements consisting
primarily of ground leases related to 167 real estate investments,
excluding those ground leases the Company has prepaid. At
December 31, 2022, the Company had 242 properties totaling
17.8 million square feet that were held under ground leases with a
remaining weighted average term of 64.4 years, including renewal
options. These ground leases typically have initial terms of 50 to
75 years with one or more renewal options extending the terms to 75
to 100 years, with expiration dates through 2119.
Purchase Options
The Company had approximately $100.4 million in real estate
properties as of December 31, 2022 that were subject to
exercisable purchase options. The Company has approximately
$1.1 billion in real estate properties that are subject to
purchase options that will become exercisable after 2022.
Additional information about the amount and basis for determination
of the purchase price is detailed in the table below (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NUMBER OF PROPERTIES |
GROSS REAL ESTATE INVESTMENT AS OF DECEMBER 31, 2022 |
YEAR EXERCISABLE |
MOB |
INPATIENT |
FAIR MARKET
VALUE METHOD
1
|
NON FAIR MARKET
VALUE METHOD
2
|
TOTAL |
Current
3
|
3 |
|
2 |
|
$ |
100,366 |
|
$ |
— |
|
$ |
100,366 |
|
2023 |
2 |
|
— |
|
36,171 |
|
— |
|
36,171 |
|
2024 |
— |
|
— |
|
— |
|
— |
|
— |
|
2025 |
6 |
|
1 |
|
88,412 |
|
44,459 |
|
132,871 |
|
2026 |
5 |
|
1 |
|
179,929 |
|
— |
|
179,929 |
|
2027 |
4 |
|
— |
|
110,125 |
|
— |
|
110,125 |
|
2028 |
2 |
|
2 |
|
109,399 |
|
— |
|
109,399 |
|
2029 |
2 |
|
1 |
|
81,794 |
|
— |
|
81,794 |
|
2030 |
— |
|
— |
|
— |
|
— |
|
— |
|
2031 |
3 |
|
1 |
|
108,769 |
|
— |
|
108,769 |
|
2032 |
2 |
|
— |
|
24,628 |
|
— |
|
24,628 |
|
2033 and thereafter
4
|
10 |
|
— |
|
334,634 |
|
— |
|
334,634 |
|
Total |
39 |
|
8 |
|
$ |
1,174,227 |
|
$ |
44,459 |
|
$ |
1,218,686 |
|
1The
purchase option price includes a fair market value component that
is determined by an appraisal process.
2Includes
properties with stated purchase prices or prices based on fixed
capitalization rates.
3These
purchase options have been exercisable for an average of 15.6
years.
4
Includes two medical office buildings that are recorded in the line
item Investment in financing receivable, net on the Company's
Consolidated Balance Sheet.
Debt Management
The Company maintains a conservative and flexible capital structure
that allows it to fund new investments and operate its existing
portfolio. The Company has approximately $84.1 million of mortgage
notes payable, most of which were assumed when the Company acquired
properties. In 2023, the Company has approximately $34.3 million of
mortgage notes payable that will mature or are able to be repaid
without penalty. The Company will repay mortgages with cash on hand
or borrowings under the Unsecured Credit Facility.
Impact of Inflation
The Company is subject to the risk of inflation as most of its
revenues are derived from long-term leases. Most of the Company's
leases provide for fixed increases in base rents or increases based
on the Consumer Price Index, and require the tenant to pay all or
some portion of increases in operating expenses. The Company
believes that these provisions mitigate the impact of inflation.
However, there can be no assurance that the Company's ability to
increase rents or recover operating expenses will keep pace with
inflation. The Company's leases have a weighted average lease term
remaining of approximately 4.5 years. The Company has 93.6% of
leases that provide for fixed base rent increases and 6.4% that
provide for Consumer Price Index-based rent increases as of
December 31, 2022.
New Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements for information
on new accounting standards including both standards that the
Company adopted during the year and those that have not yet been
adopted. The Company continues to evaluate the impact of the new
standards that have not yet been adopted.
Other Items Impacting Operations
General and administrative expenses will fluctuate
quarter-to-quarter. In the first quarter of each year, general and
administrative expense includes increases for certain expenses such
as payroll taxes and healthcare savings account fundings. The
Company expects these customary expenses to increase by
approximately $0.8 million in the first quarter of 2023.
Approximately $0.5 million is not expected to recur in subsequent
quarters in 2023.
Results of Operations
Year Ended December 31, 2022 Compared to Year Ended
December 31, 2021
The Company’s consolidated results of operations for 2022 compared
to 2021 were significantly impacted by the Merger, acquisitions,
dispositions, gain on sales and impairment charges recorded on real
estate properties, and capital markets transactions.
Revenues
Rental income increased $387.1 million, or 74.4%, to approximately
$907.5 million compared to $520.3 million in the prior year and is
comprised of the following:
•Acquisitions
in 2021 and 2022 contributed $49.2 million.
•Leasing
activity contributed $16.3 million.
•Dispositions
in 2021 and 2022 resulted in a decrease of $23.6
million.
•Impact
from the Merger contributed $345.2 million.
Interest income increased $7.3 million, or 173.9%, from the prior
year period and is comprised of the following
activity:
•Two
financing receivables acquired during 2021 contributed $3.9
million.
•Interest
from notes receivables assumed in the Merger totaling $3.4
million.
Other operating income increased $3.4 million, or 33.2%, from the
prior year primarily as a result of income from transient parking
and management fees assumed with the Merger.
Expenses
Property operating expenses increased $131.8 million, or 62.1%,
from the prior year primarily as a result of the following
activity:
•Acquisitions
in 2021 and 2022 resulted in an increase of $19.6
million.
•Increases
in portfolio operating expenses as follows:
◦Utilities
expense of $4.0 million;
◦Compensation
of $2.3 million;
◦Leasing
commission amortization of $1.9 million;
◦Janitorial
expense of $1.2 million;
◦Maintenance
and repair expense of $0.8 million;
◦Property
tax of $0.6 million;
◦Security
of $0.5 million;
◦Administrative
and other legal expense of $0.5 million; and
◦Insurance
expense of $0.4 million.
•Dispositions
in 2021 and 2022 resulted in a decrease of $11.9
million.
•Impact
from the Merger resulted in an increase of $111.9
million.
General and administrative expenses increased approximately $18.6
million, or 54.4%, from the prior year primarily as a result of the
following activity:
•Compensation
expense increased $6.3 million, including $3.5 million of non-cash
expense.
•Net
increases, including professional fees, audit services, travel and
other administrative costs of $4.9 million.
•Impact
from the Merger resulted in an increase of $7.4
million.
Merger-related costs totaled $103.4 million consisting primarily of
legal, consulting, and banking
services incurred
in connection with the Merger.
Depreciation and amortization expense increased $250.4 million, or
123.5%, from the prior year primarily as a result of the following
activity:
•Acquisitions
in 2021 and 2022 resulted in increases of $25.9
million.
•Various
building and tenant improvement expenditures caused increases of
$10.1 million.
•Dispositions
in 2021 and 2022 resulted in decreases of $7.8
million.
•Assets
that became fully depreciated resulted in decreases of $10.4
million.
•Impact
from the Merger, including purchase accounting fair value
adjustments, resulted in an increase of $232.6
million.
Other Income (Expense)
Other income (expense), increased $79.6 million, or 527.6%, from
the prior year mainly due to the following activity:
Gain on Sales of Real Estate Properties
Gain on sales of real estate properties totaling approximately
$270.3 million and $55.9 million are associated with the sales of
10 and 12 real estate properties during 2022 and 2021,
respectively.
Interest Expense
Interest expense increased $93.6 million for the year ended
December 31, 2022 compared to the prior year. The components
of interest expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHANGE |
Dollars in thousands |
2022 |
2021 |
$ |
% |
Contractual interest |
$ |
118,085 |
|
$ |
48,740 |
|
$ |
69,345 |
|
142.3 |
% |
Net discount/premium accretion |
18,227 |
|
105 |
|
18,122 |
|
17,259.0 |
% |
Debt issuance costs amortization |
4,256 |
|
2,873 |
|
1,383 |
|
48.1 |
% |
Amortization of interest rate swap settlement |
168 |
|
168 |
|
— |
|
— |
% |
Amortization of treasury hedge settlement |
427 |
|
427 |
|
— |
|
— |
% |
Fair value derivative |
4,057 |
|
— |
|
4,057 |
|
N/A |
Interest cost capitalization |
(1,409) |
|
(221) |
|
(1,188) |
|
537.6 |
% |
Interest on lease liabilities |
2,880 |
|
1,032 |
|
1,848 |
|
179.1 |
% |
Total interest expense |
$ |
146,691 |
|
$ |
53,124 |
|
$ |
93,567 |
|
176.1 |
% |
Contractual interest increased $69.3 million, or 142.3%, primarily
as a result of the following activity:
•Senior
notes and unsecured term loans assumed in the Merger accounted for
an increase of approximately $51.9 million.
•New
unsecured term loans executed with the Unsecured Credit Facility
accounted for an increase of approximately $9.9
million.
•The
Unsecured Credit Facility accounted for an increase of
approximately $15.4 million due to an increased weighted average
balance outstanding and an increase in the weighted average
interest rate.
•Active
interest rate derivatives accounted for a decrease of $6.7
million.
•Mortgage
note repayments, net of assumptions, accounted for a decrease of
approximately $1.2 million.
Loss on extinguishment of debt
The Company recognized a loss on early extinguishment of debt in
2022 of approximately $2.4 million, primarily related to the
amendment of the Unsecured Credit Facility and the early
extinguishment of two mortgage notes payable.
Impairment of Real Estate Assets
Impairment of real estate assets in 2022 totaling approximately
$54.4 million is associated with completed or planned disposition
activity.
Impairment of real estate assets in 2021 totaling approximately
$17.1 million in 2021 is associated with the sales of five real
estate properties and one redevelopment property.
Equity income (loss) from unconsolidated joint
ventures
The Company recognizes its proportionate share of losses from its
unconsolidated joint ventures. The losses are primarily
attributable to non-cash depreciation expense. See Note 5 for more
details regarding the Company's unconsolidated joint
ventures.
Year Ended December 31, 2021 Compared to Year Ended
December 31, 2020
The Company's discussion regarding the comparison of the year ended
December 31, 2021 compared to the year ended December 31,
2020 was previously disclosed beginning on page 38 of Legacy HR's
Annual Report on Form 10-K for the year ended December 31, 2021
filed with the SEC on February 16, 2022, and is incorporated herein
by reference.
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 Consolidated Financial
Statements and other financial data included elsewhere in this
Annual Report on Form 10-K.
Funds from Operations ("FFO"), Normalized FFO and Funds Available
for Distribution ("FAD")
FFO and FFO per share are operating performance measures adopted by
the National Association of Real Estate Investment Trusts
(“NAREIT”). NAREIT defines FFO as the most commonly accepted and
reported measure of a REIT’s operating performance equal to “net
income (computed in accordance with GAAP), excluding gains (or
losses)
from sales of property, plus depreciation and amortization,
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, deferred financing
fees amortization, share-based compensation expense and provision
for bad debts, net; and subtracting straight-line rent income, net
of expense, and maintenance capital expenditures, including second
generation tenant improvements, capital expenditures and leasing
commissions paid. 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 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 gains on sales of real estate, impairments and
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 attributable to common
stockholders to FFO, Normalized FFO and FAD attributable to common
stockholders for the years ended December 31, 2022, 2021, and
2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED DECEMBER 31, |
Amounts in thousands, except per share data |
2022 |
|
2021 |
|
2020 |
|
Net income attributable to common stockholders |
$ |
40,897 |
|
$ |
66,659 |
|
$ |
72,195 |
|
Gain on sales of real estate assets |
(270,271) |
|
(55,940) |
|
(70,361) |
|
Impairments |
54,427 |
|
17,101 |
|
— |
|
Real estate depreciation and amortization |
459,211 |
|
208,155 |
|
194,574 |
|
Non-controlling income from operating partnership units |
(5) |
|
— |
|
— |
|
Proportionate share of unconsolidated joint ventures |
12,722 |
|
5,541 |
|
564 |
|
FFO attributable to common stockholders |
296,981 |
|
241,516 |
|
196,972 |
|
Acquisition and pursuit costs
1
|
3,229 |
|
3,930 |
|
2,561 |
|
Merger-related costs |
103,380 |
|
— |
|
— |
|
Fair value of debt instruments |
21,248 |
|
— |
|
— |
|
Lease intangible amortization
3
|
1,028 |
|
162 |
|
690 |
|
|
|
|
|
Non-routine legal costs/forfeited earnest money received
2
|
771 |
|
(35) |
|
— |
|
Debt financing costs
4
|
3,145 |
|
283 |
|
21,920 |
|
Unconsolidated JV normalizing items
5
|
330 |
|
225 |
|
16 |
|
Normalized FFO attributable to common stockholders |
430,112 |
|
246,081 |
|
222,159 |
|
Non-real estate depreciation and amortization |
2,217 |
|
2,397 |
|
3,154 |
|
Non-cash interest expense amortization
6
|
5,129 |
|
3,182 |
|
3,691 |
|
Provision for bad debt, net |
516 |
|
73 |
|
207 |
|
Straight-line rent income, net |
(20,124) |
|
(4,303) |
|
(2,245) |
|
Share-based compensation |
14,294 |
|
10,729 |
|
9,922 |
|
Proportionate share of unconsolidated joint ventures |
(1,206) |
|
(1,357) |
|
27 |
|
Normalized FFO adjusted for non-cash items |
430,938 |
|
256,802 |
|
236,915 |
|
2nd Generation tenant improvements |
(33,620) |
|
(26,363) |
|
(26,209) |
|
Leasing commissions paid |
(22,929) |
|
(11,742) |
|
(10,369) |
|
Capital expenditures |
(48,913) |
|
(19,582) |
|
(21,758) |
|
Maintenance capital expenditures |
(105,462) |
|
(57,687) |
|
(58,336) |
|
FAD attributable to common stockholders |
$ |
325,476 |
|
$ |
199,115 |
|
$ |
178,579 |
|
FFO per common share - diluted |
$ |
1.17 |
|
$ |
1.68 |
|
$ |
1.46 |
|
Normalized FFO per common share - diluted |
$ |
1.69 |
|
$ |
1.71 |
|
$ |
1.65 |
|
Weighted average common shares outstanding - diluted
7
|
254,622 |
|
143,618 |
|
134,835 |
|
1Acquisition
and pursuit costs include third party and travel costs related to
the pursuit of acquisitions and developments.
2Non-routine
legal costs include expenses related to disputes with a contractor
and a tenant relating to a violation of use restrictions. Forfeited
earnest money received related to a disposition that did not
close.
3Includes
above or below market lease intangibles that are identified upon
building acquisitions.
4Amount
for 2020 includes the loss on extinguishment of debt on the
extinguishment of the Senior Notes due 2023 of $21.5 million and
double interest incurred on the timing of issuance of the Senior
Notes due 2031 and the redemption of the Senior Notes due 2023 of
$0.4 million.
5Includes
the Company's proportionate share of acquisition and pursuit costs
related to unconsolidated joint ventures.
6Includes
the amortization of deferred financing costs, discounts and
premiums, and non-cash financing receivable
amortization.
7The
Company utilizes the treasury stock method which includes the
dilutive effect of nonvested share-based awards outstanding of
748,385, 907,393, and 828,506 for the years ended December 31,
2022, 2021, and 2020, respectively.
Same Store Cash NOI
Cash NOI and same store cash NOI are key performance indicators.
Management considers same store cash NOI a supplemental measure
because it allows investors, analysts and Company management to
measure unlevered property-level operating results. Cash NOI
excludes general and administrative expenses, interest expense,
depreciation and amortization, gains and losses from property
sales, property management fees and other revenues and expenses not
specifically related to the property portfolio. Cash NOI also
excludes non-cash items such as straight-line rent, above and below
market lease intangibles, leasing commission amortization, lease
inducements,
and tenant improvement amortization. The Company also excludes cash
lease termination fees. Same store 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.
The Company's same store calculation included 593 properties with a
gross investment of $11.9 billion. Cash NOI for the years ended
December 31, 2022 and 2021 was $722.6 million and $705.0 million,
respectively, resulting in year-over-year growth of
2.5%.
The following tables reconcile same store cash NOI to the
respective line items in the Consolidated Statements of Income and
the same store property count to the total owned real estate
portfolio:
Reconciliation of Same Store Cash NOI
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED DECEMBER 31, |
|
Dollars in thousands |
2022 |
2021 |
PERCENTAGE GROWTH |
Net income attributable to common stockholders |
$ |
40,897 |
|
$ |
66,659 |
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
(64,519) |
|
15,089 |
|
|
General and administrative expense |
52,734 |
|
34,152 |
|
|
Depreciation and amortization expense |
453,082 |
|
202,714 |
|
|
Other expenses
1
|
120,576 |
|
14,164 |
|
|
Straight-line rent revenue |
(23,498) |
|
(5,801) |
|
|
Joint venture properties |
15,222 |
|
8,299 |
|
|
Other revenue
2
|
(16,577) |
|
(8,117) |
|
|
Cash NOI |
577,917 |
|
327,159 |
|
76.6 |
% |
Pre-merger Legacy HTA NOI |
281,780 |
|
497,354 |
|
|
Proforma Cash NOI |
859,697 |
|
824,513 |
|
4.3 |
% |
Cash NOI not included in same store |
(127,391) |
|
(101,823) |
|
25.1 |
% |
Same store and redevelopment cash NOI
|
732,306 |
|
722,690 |
|
1.3 |
% |
Redevelopment NOI |
(9,743) |
|
(17,737) |
|
(45.1) |
% |
Same store cash NOI |
$ |
722,563 |
|
$ |
704,953 |
|
2.5 |
% |
1Includes
acquisition and pursuit costs, bad debt, above and below market
ground lease intangible amortization, leasing commission
amortization, non-cash adjustments for financing receivables and
ground lease straight-line rent.
2Includes
management fee income, interest, above and below market lease
intangible amortization, lease inducement amortization, lease
terminations and tenant improvement overage
amortization.
Reconciliation of Same Store Property Count
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF DECEMBER 31, 2022 |
Dollars and square feet in thousands |
PROPERTY COUNT |
GROSS INVESTMENT
1
|
SQUARE
FEET |
OCCUPANCY |
Same store properties |
593 |
|
$ |
11,933,696 |
|
35,227 |
|
89.3 |
% |
Acquisitions |
74 |
|
1,259,600 |
|
3,399 |
|
87.1 |
% |
Development completions |
6 |
|
172,845 |
|
410 |
|
86.8 |
% |
Redevelopment |
15 |
|
307,229 |
|
1,314 |
|
59.4 |
% |
Total owned real estate properties |
688 |
|
$ |
13,673,370 |
|
40,350 |
|
87.8 |
% |
1Gross
investment excludes land held for development, construction in
progress, corporate property, and investment in financing
receivables. Gross investment also includes a $8.7 million imputed
lease included in the financing lease right-of-use
assets.
Application of Critical Accounting Policies to Accounting
Estimates
The Company’s Consolidated Financial Statements are prepared in
accordance with GAAP and the rules and regulations of the SEC. In
preparing the Consolidated Financial Statements, management is
required to exercise judgment and make assumptions that impact the
carrying amount of assets and liabilities and the reported amounts
of revenues and expenses reflected in the Consolidated Financial
Statements.
Management routinely evaluates the estimates and assumptions used
in the preparation of its Consolidated Financial Statements. These
regular evaluations consider historical experience and other
reasonable factors and use the seasoned judgment of management
personnel. Management has reviewed the Company’s critical
accounting policies with the Audit Committee of the Board of
Directors.
Management believes the following paragraphs in this section
describe the application of critical accounting policies and
estimates by management to arrive at the critical accounting
estimates reflected in the Consolidated Financial Statements. The
Company’s accounting policies are more fully discussed in Note 1 to
the Consolidated Financial Statements.
Principles of Consolidation
The Company’s Consolidated Financial Statements include the
accounts of the Company, its wholly owned subsidiaries, joint
ventures, and partnerships where the Company controls the operating
activities. All material intercompany accounts and transactions
have been eliminated.
Merger-Related Accounting Acquirer Determination
The Merger was considered a reverse acquisition where Legacy HR was
considered the accounting acquirer even though Legacy HTA was the
legal issuer of equity interests in connection with the Merger.
Legacy HR was identified as the accounting acquirer after
consideration of various indicators outlined in Accounting
Standards Codification, Topic 805 as they apply to the specific
facts and circumstances of the Merger. The strongest factors
supporting the treatment of Legacy HR as the accounting acquirer
included that the executive team of the consolidated Company will
be comprised of then-current Legacy HR senior management (with none
of the then-current Legacy HTA executives expected to retain their
current positions after the Merger) and the thirteen member board
of directors of the consolidated company would be comprised of all
nine members of the Legacy HR Board serving immediately prior to
the effective time of the Merger and four members selected by
Legacy HTA.
Capitalization of Costs
GAAP generally allows for the capitalization of various types of
costs. The rules and regulations on capitalizing costs and the
subsequent depreciation or amortization of those costs versus
expensing them in the period incurred vary depending on the type of
costs and the reason for capitalizing the costs.
Direct costs of a development project generally include
construction costs, professional services such as architectural and
legal costs, travel expenses, and land acquisition costs as well as
other types of fees and expenses. These costs are capitalized as
part of the basis of an asset to which such costs relate. Indirect
costs include capitalized interest and overhead costs. Indirect
costs are capitalized during construction and on the unoccupied
space in a property for up to one year after the property is ready
for its intended use. Capitalized interest is calculated using the
weighted average interest rate of the Company's unsecured debt or
the interest rate on project specific debt, if applicable.
The
Company’s overhead costs are based on overhead load factors that
are charged to a project based on direct time incurred. The Company
computes the overhead load factors annually for its acquisition and
development departments, which have employees who are involved in
the projects. The overhead load factors are computed to absorb that
portion of indirect employee costs (payroll and benefits, training,
and similar costs) that are attributable to the productive time the
employee incurs working directly on projects. The employees in the
Company’s development departments who work on these projects
maintain and report their hours, by project. Employee costs that
are administrative, such as vacation time, sick time, or general
and administrative time, are expensed in the period
incurred.
Acquisition-related costs include finder’s fees, advisory, legal,
accounting, valuation, other professional or consulting fees, and
certain general and administrative costs. Acquisition-related costs
are expensed in the period incurred for acquisitions accounted for
as a business combination under Accounting Standards Codification
Topic 805,
Business Combinations.
These costs associated with asset acquisitions are capitalized in
accordance with GAAP.
Management’s judgment is also exercised in determining whether
costs that have been previously capitalized to a project should be
reserved for or written off if or when the project is abandoned or
circumstances otherwise change that would call the project’s
viability into question. The Company follows a standard and
consistently applied policy of classifying pursuit activity as well
as reserving for these types of costs based on their
classification.
The Company classifies its pursuit projects into two categories
relating to development. The first category includes pursuits of
developments that have a remote chance of producing new business.
Costs for these projects are expensed in the period incurred. The
second category includes those pursuits of developments that are
either probable or highly probable to result in a project or
contract. Since the Company believes it is probable that these
pursuits will result in a project or contract, it capitalizes these
costs in full and records no reserve.
Each quarter, all capitalized pursuit costs are again reviewed for
viability or a change in classification, and a management decision
is made as to whether any additional reserve is deemed necessary.
If necessary and considered appropriate, management would record an
additional reserve at that time. Capitalized pursuit costs, net of
the reserve, are carried in other assets in the Company’s
Consolidated Balance Sheets, and any reserve recorded is charged to
acquisition and pursuit costs on the Consolidated Statements of
Income. All pursuit costs will ultimately be written off to expense
or capitalized as part of the constructed real estate
asset.
As of December 31, 2022 and 2021, the Company's Consolidated
Balance Sheets include capitalized pursuit costs relating to
potential developments totaling $4.3 million and $5.1 million
respectively. The Company expensed costs related to the pursuit of
acquisitions totaling $1.0 million, $2.6 million and $1.0 million
for the years ended December 31, 2022, 2021 and 2020, respectively.
In addition, the Company expensed costs related to the pursuit of
developments totaling $2.2 million, $1.4 million and $1.6 million
for the years ended December 31, 2022, 2021 and 2020, respectively.
Furthermore, the Company expensed costs related to the Merger
totaling $103.4 million for the year ended December 31,
2022.
Valuation of Long-Lived Assets Held and Used, Unconsolidated Joint
Ventures, Intangible Assets and Goodwill
Long-Lived Assets Held and Used
The Company assesses the potential for impairment of identifiable
intangible assets and long-lived assets, primarily real estate
properties, whenever events occur or a change in circumstances
indicates that the carrying value might not be recoverable.
Important factors that could cause management to review for
impairment include significant underperformance of an asset
relative to historical or expected operating results; significant
changes in the Company's use of assets or the strategy for its
overall business; plans to sell an asset before its depreciable
life has ended; the expiration of a significant portion of leases
in a property; or significant negative economic trends or negative
industry trends for the Company or its operators. In addition, the
Company reviews for possible impairment of those assets subject to
purchase options and those impacted by casualties, such as
tornadoes and hurricanes.
In addition, at least annually, the Company assesses whether there
were indicators, including property operating performance, changes
in anticipated holding period and general market conditions, that
the value of the Company’s investments, including unconsolidated
joint ventures, may have been impaired. The investment’s value
would have
been impaired only if management’s estimate of the fair value of
the Company’s investment was less than its carrying value. To the
extent impairment had occurred, a loss would have been recognized
for the excess of its carrying amount over its fair
value.
The Company may, from time to time, be approached by a third party
with interest in purchasing one or more of the Company's operating
real estate properties that was otherwise not for sale.
Alternatively, the Company may explore disposing of an operating
real estate property but without specific intent to sell the
property and without the property meeting the criteria to be
classified as held for sale (see discussion below). In such cases,
the Company and a potential buyer typically negotiate a letter of
intent followed by a purchase and sale agreement that includes a
due diligence time line for completion of customary due diligence
procedures. Anytime throughout this period the transaction could be
terminated by the parties. The Company views the execution of a
purchase and sale agreement as a circumstance that warrants an
impairment assessment and must include its best estimates of the
impact of a potential sale in the recoverability test discussed in
more detail below.
A property value is considered impaired only if management's
estimate of current and projected (undiscounted and unleveraged)
operating cash flows of the property is less than the net carrying
value of the property. These estimates of future cash flows include
only those that are directly associated with and that are expected
to arise as a direct result of the use and eventual disposition of
the property based on its estimated remaining useful life. These
estimates, including the useful life determination which can be
affected by any potential sale of the property, are based on
management's assumptions about its use of the property. Therefore,
significant judgment is involved in estimating the current and
projected cash flows.
When the Company executes a purchase and sale agreement for a held
and used property, the Company performs the cash flow estimation
described above. This assessment gives consideration to all
available information, including an assessment of the likelihood
the potential transaction will be consummated under the terms and
conditions set forth in the purchase and sale agreement. Management
will re-evaluate the recoverability of the property if and when
significant changes occur as the transaction proceeds toward
closing. Normally sale transactions will close within 15 to 30 days
after the due diligence period expires. Upon expiration of the due
diligence period, management will again re-evaluate the
recoverability of the property, updating its assessment based on
the status of the potential sale.
Whenever management determines that the carrying value of an asset
that has been tested may not be recoverable, then an impairment
charge would be recognized to the extent the current carrying value
exceeds the current fair value of the asset. Significant judgment
is also involved in making a determination of the estimated fair
value of the asset.
The Company also performs an annual goodwill impairment review. The
Company's reviews are performed as of December 31 of each year. The
Company's 2022 goodwill asset was $223.2 million after giving
effect to the Merger. The 2021 review indicated that no impairment
had occurred with respect to the Company's $3.5 million goodwill
asset.
Long-Lived Assets to be Disposed of by Planned Sale
From time to time management affirmatively decides to sell certain
real estate properties under a plan of sale. The Company
reclassifies the property or disposal group as held for sale when
all the following criteria for a qualifying plan of sale are
met:
•Management,
having the authority to approve the action, commits to a plan to
sell the property or disposal group;
•The
property or disposal group is available for immediate sale (i.e., a
seller currently has the intent and ability to transfer the
property or disposal group to a buyer) in its present condition,
subject only to conditions that are usual and customary for sales
of such properties or disposal groups;
•An
active program to locate a buyer and other actions required to
complete the plan to sell have been initiated;
•The
sale of the property or disposal group is probable (i.e., likely to
occur) and the transfer is expected to qualify for recognition as a
completed sale within one year, with certain
exceptions;
•The
property or disposal group is being actively marketed for sale at a
price that is reasonable in relation to its current fair value;
and
•Actions
necessary to complete the plan indicate that it is unlikely
significant changes to the plan will be made or that the plan will
be withdrawn.
A property or disposal group classified as held for sale is
initially measured at the lower of its carrying amount or fair
value less estimated costs to sell. An impairment charge is
recognized for any initial adjustment of the property's or disposal
group's carrying amount to its fair value less estimated costs to
sell in the period the held for sale criteria are met. The fair
value less estimated costs to sell the property (disposal group)
should be assessed each reporting period it remains classified as
held for sale. Depreciation ceases as long as a property is
classified as held for sale.
If circumstances arise that were previously considered unlikely and
a subsequent decision not to sell a property classified as held for
sale were to occur, the property is reclassified as held and used.
The property is measured at the time of reclassification at the
lower of its (a) carrying amount before it was classified as held
for sale, adjusted for any depreciation expense or impairment
losses that would have been recognized had the property been
continuously classified as held and used or (b) fair value at the
date of the subsequent decision not to sell. The effect of any
required adjustment is reflected in income from continuing
operations at the date of the decision not to sell.
The Company recorded impairment charges totaling $54.4 million
for the year ended December 31, 2022 related to real estate
properties and other long-lived assets. The impairment charges
related to 12 properties sold and three additional properties
associated with completed or planned disposition activity in 2022.
The Company recorded impairment charges of $17.1 million in
2021.
Valuation of Asset Acquisitions
As described in more detail in Note 1 to the Consolidated Financial
Statements, when the Company acquires real estate properties with
in-place leases, the cost of the acquisition must be allocated
between the acquired tangible real estate assets “as if vacant” and
any acquired intangible assets. Such intangible assets could
include above- (or below-) market in-place leases and at-market
in-place leases, which could include the opportunity costs
associated with absorption period rentals, direct costs associated
with obtaining new leases such as tenant improvements, leasing
commissions and customer relationship assets. With regard to the
elements of estimating the “as if vacant” values of the property
and the intangible assets, including the absorption period,
occupancy increases during the absorption period, tenant
improvement amounts, and leasing commission percentages, the
Company uses the same absorption period and occupancy assumptions
for similar property types. Any remaining excess purchase price is
then allocated to the tangible and intangible assets based on their
relative fair values. The identifiable tangible and intangible
assets are then subject to depreciation and
amortization.
Depreciation of Real Estate Assets and Amortization of Related
Intangible Assets
As of December 31, 2022, the Company had gross investments of
approximately $12.7 billion in depreciable real estate assets and
related intangible assets. When real estate assets and related
intangible assets are acquired or placed in service, they must be
depreciated or amortized. Management’s judgment involves
determining which depreciation method to use, estimating the
economic life of the building and improvement components of real
estate assets, and estimating the value of intangible assets
acquired when real estate assets are purchased that have in-place
leases.
With respect to the building components, there are several
depreciation methods available under GAAP. Some methods record
relatively more depreciation expense on an asset in the early years
of the asset’s economic life, and relatively less depreciation
expense on the asset in the later years of its economic life. The
straight-line method of depreciating real estate assets is the
method the Company follows because, in the opinion of management,
it is the method that most accurately and consistently allocates
the cost of the asset over its estimated life. The Company assigns
a useful life to its owned properties based on many factors,
including the age and condition of the property when
acquired.
Revenue Recognition
The Company's primary source of revenue is rental income derived
from non-cancelable leases. When a lease is executed, the terms and
conditions of the lease are assessed to determine the appropriate
accounting classification. As of December 31, 2022, all of the
Company's leases, where the Company is the lessor, are classified
as operating leases. Operating leases are recognized on the
straight-line basis over the term of the related lease, including
periods where a tenant is provided a rent concession. Operating
expense recoveries, which includes reimbursements for building
specific operating expenses, are recognized as revenue in the
period in which the related expenses are incurred. The Company
generally expects that collectability is probable at lease
commencement. If the assessment of collectability changes after the
lease commencement date and Rental income is not considered
probable, Rental income is recognized on a cash basis and all
previously recognized uncollectible Rental income is reversed in
the period in which it is determined not to be probable of
collection. In addition to the lease-specific collectability
assessment performed under Topic 842, the Company may also apply a
general reserve ("provision for bad debt"), as a reduction to
Rental income, for its portfolio of operating lease
receivables.
The Company also recognizes certain revenue based on the guidance
in Topic 606 and is based on the five-step model to account for
revenue arising from contracts with customers. The Company's
primary source of revenue associated with Topic 606 relates to
parking revenue and management fee income.
Derivative Instruments
Hedge accounting generally provides for the matching of the timing
of gain or loss recognition on the derivative instrument with the
recognition of the changes in the fair-value of the hedged asset or
liability that are attributable to the hedged risk in a fair value
hedge or the earnings effect of the hedged forecasted transaction
in a cash flow hedge. The accounting for a derivative requires that
the Company make judgments in determining the nature of the
derivatives and their effectiveness, including ones regarding the
likelihood that a forecasted transaction will take place. These
judgments could materially affect our consolidated financial
statements.
The Company may enter into a derivative instrument to manage
interest rate risk from time to time. When a derivative instrument
is initiated, the Company will assess its intended use of the
derivative instrument and may elect a hedging relationship and
apply hedge accounting. As required by the accounting literature,
the Company will formally document the hedging relationship for all
derivative instruments prior to or contemporaneous with entering
into the derivative instrument.
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
The Company is exposed to market risk in the form of changing
interest rates on its debt. Management uses regular monitoring of
market conditions and analysis techniques to manage this
risk.
As of December 31, 2022, $3.5 billion of the Company’s
$5.4 billion of outstanding debt bore interest at fixed
rates.
The following table provides information regarding the sensitivity
of certain of the Company’s financial instruments, as described
above, to market conditions and changes resulting from changes in
interest rates. For purposes of this analysis, sensitivity is
demonstrated based on hypothetical 10% changes in the underlying
market interest rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IMPACT ON EARNINGS AND CASH FLOW |
Dollars in thousands |
OUTSTANDING
PRINCIPAL BALANCE
as of Dec. 31, 2022 |
CALCULATED
ANNUAL INTEREST |
ASSUMING 10%
INCREASE
in market interest rates |
ASSUMING 10%
DECREASE
in market interest rates |
Variable Rate Debt |
|
|
|
|
Unsecured Credit Facility |
$ |
385,000 |
|
$ |
20,290 |
|
$ |
(2,029) |
|
$ |
2,029 |
|
Unsecured Term Loan due 2025 |
350,000 |
|
18,095 |
|
(1,810) |
|
1,810 |
|
Unsecured Term Loan due 2026 |
200,000 |
|
10,340 |
|
(1,034) |
|
1,034 |
|
Unsecured Term Loan due 2026 |
300,000 |
|
15,510 |
|
(1,551) |
|
1,551 |
|
Unsecured Term Loan due 2026 |
150,000 |
|
7,755 |
|
(776) |
|
776 |
|
Unsecured Term Loan due 2027 |
200,000 |
|
10,340 |
|
(1,034) |
|
1,034 |
|
Unsecured Term Loan due 2028 |
300,000 |
|
15,510 |
|
(1,551) |
|
1,551 |
|
|
$ |
1,885,000 |
|
$ |
97,840 |
|
$ |
(9,785) |
|
$ |
9,785 |
|
The Company has outstanding interest rate swaps to help mitigate
its risk related to variable rate debt. As of December 31, 2022,
the Company had $1.2 billion of interest rate swaps at a weighted
average rate of 2.63%. See Note 11 to the Consolidated Financial
Statements for more information regarding the Company's interest
rate swaps.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FAIR VALUE |
Dollars in thousands |
CARRYING VALUE
as of Dec. 31, 2022
2
|
DEC. 31, 2022 |
ASSUMING 10%
INCREASE
in market interest rates |
ASSUMING 10%
DECREASE
in market interest rates |
DEC. 31, 2021
1
|
Fixed Rate Debt |
|
|
|
|
|
Senior Notes due 2025 |
$ |
249,115 |
|
$ |
241,413 |
|
$ |
240,866 |
|
$ |
241,916 |
|
$ |
253,110 |
|
Senior Notes due 2026 |
571,587 |
|
570,139 |
|
568,234 |
|
571,940 |
|
— |
|
Senior Notes due 2027 |
479,553 |
|
473,450 |
|
471,535 |
|
475,298 |
|
— |
|
Senior Notes due 2028 |
296,852 |
|
271,058 |
|
272,142 |
|
269,914 |
|
311,594 |
|
Senior Notes due 2030 |
565,402 |
|
560,723 |
|
549,682 |
|
556,431 |
|
— |
|
Senior Notes due 2030 |
296,385 |
|
236,219 |
|
234,692 |
|
237,675 |
|
288,886 |
|
Senior Notes due 2031 |
295,547 |
|
219,321 |
|
226,475 |
|
220,856 |
|
275,696 |
|
Senior Notes due 2031 |
632,693 |
|
611,392 |
|
606,887 |
|
615,727 |
|
— |
|
Mortgage Notes Payable |
84,247 |
|
80,913 |
|
80,734 |
|
81,041 |
|
104,634 |
|
Total Fixed Rate Debt |
$ |
3,471,381 |
|
$ |
3,264,628 |
|
$ |
3,251,247 |
|
$ |
3,270,798 |
|
$ |
1,233,920 |
|
1Fair
values as of December 31, 2021 represent fair values of obligations
that were outstanding as of that date, and do not reflect the
effect of any subsequent changes in principal balances and/or
additions or extinguishments of instruments.
2Balances
are presented net of discounts and debt issuance costs and
including premiums. The fair value presented is based on Level 2
inputs defined as model-derived valuations in which significant
inputs and significant value drivers are observable in active
markets.
Item 8. Financial Statements and Supplementary
Data
Report of Independent Registered Public Accounting
Firm
Stockholders and Board of Directors
Healthcare Realty Trust Incorporated
Nashville, Tennessee
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of
Healthcare Realty Trust Incorporated (the “Company”) as of December
31, 2022 and 2021, the related consolidated statements of income,
comprehensive income, equity, and cash flows for each of the three
years in the period ended December 31, 2022, and the related notes
and financial statement schedules listed in the accompanying index
(collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of
the Company at December 31, 2022 and 2021, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 2022, in conformity with accounting
principles generally accepted in the United States of
America.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company's internal control over financial reporting
as of December 31, 2022, based on criteria established in Internal
Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) and
our report dated March 1, 2023 expressed an unqualified opinion
thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of
the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on
our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due
to error or fraud.
Our audits included performing procedures to assess the risks of
material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation
of the consolidated financial statements. We believe that our
audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising
from the current period audit of the consolidated financial
statements that were communicated or required to be communicated to
the audit committee and that: (1) relate to accounts or disclosures
that are material to the consolidated financial statements and (2)
involved our especially challenging, subjective, or complex
judgments. The communication of critical audit matters does not
alter in any way our opinion on the consolidated financial
statements, taken as a whole, and we are not, by communicating the
critical audit matters below, providing separate opinions on the
critical audit matters or on the accounts or disclosures to which
they relate.
Asset Impairment - Identification of Triggering Events for Real
Estate Properties
The Company recorded total real estate investments, net, of
approximately $12.4 billion as of December 31, 2022. As described
in Notes 1 and 7 to the Company's consolidated financial
statements, the Company assesses the potential for impairment of
long-lived assets, including real estate properties, whenever
events occur, or a change in circumstances indicates, that the
carrying value might not be fully recoverable ("triggering
events"). If management determines that a triggering event exists,
the estimated current and projected operating cash flows of the
property are compared to the property’s net carrying value which
may result in an impairment charge.
We identified management’s assessment of qualitative indicators of
potential impairment for real estate properties as a critical audit
matter. Qualitative indicators of potential impairment may include
significant changes in the Company’s use of properties or the
strategy for its overall business, plans to sell a property before
its depreciable life has ended, or negative economic or industry
trends for the Company or its tenants. Auditing these elements
involved especially challenging auditor judgment due to the nature
and extent of audit effort required to address these
matters.
The primary procedures we performed to address this critical audit
matter included:
•Testing
the design and operating effectiveness of controls over
management’s identification of changes in circumstances that could
indicate the carrying amounts of real estate properties may not be
fully recoverable.
•Assessing
the reasonableness of management’s key assumptions with respect to
qualitative factors, including potential sales of properties based
on offers received and changes in the use of the Company’s
properties, used to determine whether triggering events had
occurred.
•Reviewing
internal documentation to assess whether additional triggering
factors were present.
Determination of the Accounting Acquirer
As discussed in Note 2 to the consolidated financial statements,
effective July 20, 2022, Healthcare Realty Trust Incorporated
(“Legacy HR”) merged with Healthcare Trust of America, Inc.
(“Legacy HTA”), with Legacy HR continuing as the surviving entity
and a wholly-owned subsidiary of Legacy HTA. The merger was
accounted for as a reverse acquisition with Legacy HR being
identified as the accounting acquirer.
We have identified the evaluation of the Company’s determination of
the accounting acquirer to be a critical audit matter. A high
degree of auditor judgment was required to evaluate the relative
importance of the indicative factors, individually and in
aggregate, including but not limited to: (i) the composition of the
board of directors of the post-merger company, (ii) the composition
of senior management of the post-merger company, and (iii) the
premium transferred to the Legacy HTA stockholders. A different
conclusion would result in a material difference in the accounting
for the Merger.
The primary procedures we performed to address this critical audit
matter included:
•Evaluating
management’s conclusions with respect to the accounting acquirer,
including consideration of post-merger voting rights, the
composition of the board of directors and senior management of the
post-merger company, terms of the premium transferred, the relative
size of the entities, minority voting interests, and the entity
initiating the combination, as evidenced in the amended and
restated bylaws of the Company, investor presentations, the Merger
Agreement, and certain filings with the Securities and Exchange
Commission.
•Utilizing
professionals with specialized knowledge and experience in
consolidation assessments to assist in identifying and evaluating
the various factors relevant to the determination of the accounting
acquirer as well as management’s conclusions with respect to the
determination of the accounting acquirer.
Acquisition of Real Estate Properties in Connection with Business
Combination
As discussed in Note 2 to the consolidated financial statements,
Legacy HR merged into Legacy HTA, with Legacy HR continuing as the
surviving entity and a wholly-owned subsidiary of Legacy HTA. The
transaction was accounted for as business combination. In
connection with the business combination, the Company acquired real
estate investments with a preliminary estimated fair value of $8.8
billion.
We identified the volume of the fair value measurements for the
acquired real estate investments, constituting land, buildings, and
related intangible assets, recorded in connection with the merger
as a critical audit matter. The number of real estate properties
acquired in the merger increased the sensitivity of management’s
estimates with respect to the fair values of land, buildings and
related intangible assets acquired. As a result, increased auditor
effort, including the use of specialists, was required to test
management’s fair value estimates.
The primary procedures we performed to address this critical audit
matter included:
•Involving
professionals outside of the engagement team to assist in
determining the appropriate risk and controls-based approach to
testing the fair value measurements recorded in connection with the
merger.
•Testing
the details of a sample of the real estate properties acquired in
connection with the merger including evaluating the accuracy of
certain inputs into the fair value measurements including rental
payments per executed lease agreements.
•Utilizing
professionals with specialized skills and experience in valuation
to assist in testing certain of the valuation specific assumptions
used in the valuation of land, building, and related intangible
assets for a selection of real estate properties.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2005.
Nashville, Tennessee
March 1, 2023
Healthcare Realty Trust Incorporated
Consolidated Balance Sheets
Amounts in thousands, except per share data
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
DECEMBER 31, |
|
2022 |
2021 |
Real estate properties |
|
|
Land |
$ |
1,439,798 |
|
$ |
387,918 |
|
Buildings and improvements |
11,332,037 |
|
4,337,641 |
|
Lease intangibles |
959,998 |
|
120,478 |
|
Personal property |
11,907 |
|
11,761 |
|
Investment in financing receivables, net |
120,236 |
|
186,745 |
|
Financing lease right-of-use assets |
83,824 |
|
31,576 |
|
Construction in progress |
35,560 |
|
3,974 |
|
Land held for development |
74,265 |
|
24,849 |
|
Total real estate investments |
14,057,625 |
|
5,104,942 |
|
Less accumulated depreciation |
(1,645,271) |
|
(1,338,743) |
|
Total real estate investments, net |
12,412,354 |
|
3,766,199 |
|
Cash and cash equivalents |
60,961 |
|
13,175 |
|
|
|
|
|
|
|
Assets held for sale, net |
18,893 |
|
57 |
|
Operating lease right-of-use assets |
336,983 |
|
128,386 |
|
|
|
|
Investments in unconsolidated joint ventures |
327,248 |
|
161,942 |
|
Goodwill |
223,202 |
|
3,487 |
|
Other assets, net |
469,990 |
|
185,673 |
|
Total assets |
$ |
13,849,631 |
|
$ |
4,258,919 |
|
|
|
|
LIABILITIES,
REDEEMABLE NON-CONTROLLING INTERESTS, AND STOCKHOLDERS'
EQUITY |
|
DECEMBER 31, |
|
2022 |
2021 |
Liabilities |
|
|
Notes and bonds payable |
$ |
5,351,827 |
|
$ |
1,801,325 |
|
Accounts payable and accrued liabilities |
244,033 |
|
86,108 |
|
Liabilities of properties held for sale |
437 |
|
294 |
|
Operating lease liabilities |
279,895 |
|
96,138 |
|
Financing lease liabilities |
72,939 |
|
22,551 |
|
Other liabilities |
218,668 |
|
67,387 |
|
Total liabilities |
6,167,799 |
|
2,073,803 |
|
Commitments and contingencies (See Footnote 15) |
|
|
Redeemable non-controlling interests |
2,014 |
|
— |
|
Stockholders' equity |
|
|
Preferred stock, $0.01 par value; 200,000 shares authorized; none
issued and outstanding
|
— |
|
— |
|
Common stock, $0.01 par value; 1,000,000 shares authorized; 380,590
and 150,457 shares issued and outstanding at December 31, 2022 and
2021, respectively.
|
3,806 |
|
1,505 |
|
Additional paid-in capital |
9,587,637 |
|
3,972,917 |
|
Accumulated other comprehensive income (loss) |
2,140 |
|
(9,981) |
|
Cumulative net income attributable to common
stockholders |
1,307,055 |
|
1,266,158 |
|
Cumulative dividends |
(3,329,562) |
|
(3,045,483) |
|
Total stockholders’ equity |
7,571,076 |
|
2,185,116 |
|
Non-controlling interest |
108,742 |
|
— |
|
Total equity |
7,679,818 |
|
2,185,116 |
|
Total liabilities, redeemable non-controlling interests, and
stockholders' equity |
$ |
13,849,631 |
|
$ |
4,258,919 |
|
See accompanying notes.
Healthcare Realty Trust Incorporated
Consolidated Statements of Income
Amounts in thousands, except per share data
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED DECEMBER 31, |
|
2022 |
2021 |
2020 |
Revenues |
|
|
|
Rental income |
$ |
907,451 |
|
$ |
520,334 |
|
$ |
492,262 |
|
Interest income |
11,480 |
|
4,192 |
|
— |
|
Other operating |
13,706 |
|
10,291 |
|
7,367 |
|
|
932,637 |
|
534,817 |
|
499,629 |
|
Expenses |
|
|
|
Property operating |
344,038 |
|
212,273 |
|
196,514 |
|
General and administrative |
52,734 |
|
34,152 |
|
30,704 |
|
Acquisition and pursuit costs |
3,229 |
|
3,930 |
|
2,561 |
|
Merger-related costs |
103,380 |
|
— |
|
— |
|
Depreciation and amortization |
453,082 |
|
202,714 |
|
190,435 |
|
|
|
|
|
|
956,463 |
|
453,069 |
|
420,214 |
|
Other income (expense) |
|
|
|
Gain on sales of real estate properties |
270,271 |
|
55,940 |
|
70,361 |
|
Interest expense |
(146,691) |
|
(53,124) |
|
(56,174) |
|
Loss on extinguishment of debt |
(2,401) |
|
— |
|
(21,503) |
|
|
|
|
|
Impairment of real estate properties |
(54,427) |
|
(17,101) |
|
— |
|
|
|
|
|
Equity loss from unconsolidated joint ventures |
(687) |
|
(795) |
|
(463) |
|
Interest and other (expense) income, net |
(1,546) |
|
(9) |
|
559 |
|
|
64,519 |
|
(15,089) |
|
(7,220) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
40,693 |
|
66,659 |
|
72,195 |
|
Net loss attributable to non-controlling interests |
204 |
|
— |
|
— |
|
Net income attributable to common stockholders |
$ |
40,897 |
|
$ |
66,659 |
|
$ |
72,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
$ |
0.15 |
|
$ |
0.45 |
|
$ |
0.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
$ |
0.15 |
|
$ |
0.45 |
|
$ |
0.52 |
|
|
|
|
|
|