Healthcare Realty Trust Inc 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The use of the words “we,” “us,” or “our” refers to HTA and HTALP, collectively. The following discussion should be read in conjunction with our condensed consolidated financial statements and notes appearing elsewhere in this Quarterly Report, as well as with the audited consolidated financial statements, accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2019 Annual Report on Form 10-K. The information set forth below is intended to provide readers with an understanding of our financial condition, changes in financial condition and results of operations. • Forward-Looking Statements; • Executive Summary; • Company Highlights; • Critical Accounting Policies; • Recently Issued or Adopted Accounting Pronouncements; • Factors Which May Influence Results of Operations; • Results of Operations; • Non-GAAP Financial Measures; • Liquidity and Capital Resources; • Commitments and Contingencies; • Debt Service Requirements; • Off-Balance Sheet Arrangements; and • Inflation. Forward-Looking Statements Certain statements contained in this Quarterly Report constitute forward-looking statements within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”)). Such statements include, in particular, statements about our plans, strategies, prospects and estimates regarding future MOB market performance. Additionally, such statements are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially and in adverse ways from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Forward-looking statements are generally identifiable by the use of such terms as “expect,” “project,” “may,” “should,” “could,” “would,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “opinion,” “predict,” “potential,” “pro forma” or the negative of such terms and other comparable terminology. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this Quarterly Report is filed with the SEC. We cannot guarantee the accuracy of any such forward-looking statements contained in this Quarterly Report, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. Any such forward-looking statements reflect our current views about future events, are subject to unknown risks, uncertainties, and other factors, and are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations, provide dividends to stockholders and maintain the value of our real estate properties, may be significantly hindered. Factors that might impair our ability to meet such forward-looking statements include, without limitation, those discussed in Part I, Item 1A - Risk Factors in our 2019 Annual Report on Form 10-K, which is incorporated herein and those discussed in Part II, Item 1A. Risk Factors in this Quarterly Report on Form 10-Q. Forward-looking statements express expectations of future events. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties that could cause actual events or results to differ materially from those projected. Due to these inherent uncertainties, our stockholders are urged not to place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date made. In addition, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to projections over time, except as required by law. 31 Table of Contents These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning us and our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC. Executive Summary We are the largest publicly-traded REIT focused on MOBs in the U.S. as measured by the gross leasable area ("GLA") of our MOBs. We conduct substantially all of our operations through HTALP. We invest in MOBs that we believe will serve the future of healthcare delivery and MOBs that are primarily located on health system campuses, near university medical centers, or in core community outpatient locations. We also focus on key markets that have certain demographic and macro-economic trends and where we can utilize our institutional full-service operating platform to generate strong tenant and health system relationships and operating cost efficiencies. Our primary objective is to maximize stockholder value with disciplined growth through strategic investments that provide an attractive risk-adjusted return for our stockholders by consistently increasing our cash flow. In pursuing this objective, we: (i) seek internal growth through proactive asset management, leasing, building services and property management oversight; (ii) target accretive acquisitions and developments of MOBs in markets with attractive demographics that complement our existing portfolio; and (iii) actively manage our balance sheet to maintain flexibility with conservative leverage. Additionally, from time to time we consider, on an opportunistic basis, significant portfolio acquisitions that we believe fit our core business and could enhance our existing portfolio. Since 2006, we have invested $7.4 billion primarily in MOBs, development projects, land and other healthcare real estate assets consisting of approximately 25.1 million square feet of GLA throughout the U.S. Approximately 67% of our portfolio is located on the campuses of, or adjacent to, nationally and regionally recognized healthcare systems. Our portfolio is diversified geographically across 33 states, with no state having more than 20% of our total GLA as of September 30, 2020. We are concentrated in 20 to 25 key markets that are experiencing higher economic and demographic trends than other markets, on average, that we expect will drive demand for MOBs. As of September 30, 2020, we had approximately 1 million square feet of GLA in ten of our top 20 markets and approximately 93% of our portfolio, based on GLA, is located in the top 75 Metropolitan Statistical Area ("MSAs"), with Dallas, Houston, Boston, Tampa and Hartford/New Haven being our largest markets by investment. Company Highlights Portfolio Operating Performance • For the three months ended September 30, 2020, our total revenue was $187.3 million, compared to $175.0 million for the three months ended September 30, 2019. For the nine months ended September 30, 2020, our total revenue was $551.9 million, compared to $515.7 million for the nine months ended September 30, 2019. • For the three months ended September 30, 2020, our net income was $(6.9) million, compared to $(8.6) million, for the three months ended September 30, 2019. For the nine months ended September 30, 2020, our net income was $25.0 million, compared to $21.7 million for the nine months ended September 30, 2019. • For the three months ended September 30, 2020, our net income attributable to common stockholders was $(0.03) per diluted share, or $(6.8) million, compared to $(0.04) per diluted share, or $(8.5) million for the three months ended September 30, 2019. For the nine months ended September 30, 2020, our net income attributable to common stockholders was $0.11 per diluted share, or $24.6 million, compared to $0.10 per diluted share, or $21.2 million for the nine months ended September 30, 2019. • For the three months ended September 30, 2020, HTA’s FFO, as defined by NAREIT, was $68.5 million, or $0.31 per diluted share, compared to $0.31 per diluted share, or $65.0 million, for the three months ended September 30, 2019. For the nine months ended September 30, 2020, HTA’s FFO was $249.4 million, or $1.13 per diluted share, compared to $1.11 per diluted share, or $232.5 million, for the nine months ended September 30, 2019. • For the three months ended September 30, 2020, HTALP’s FFO was $68.4 million, or $0.31 per diluted OP Unit, compared to $0.31 per diluted OP unit, or $64.9 million, for the three months ended September 30, 2019. For the nine months ended September 30, 2020, HTALP’s FFO was $249.8 million, or $1.13 per diluted OP Unit, compared to $1.11 per diluted OP Unit, or $232.9 million, for the nine months ended September 30, 2019. • For the three months ended September 30, 2020, HTA’s and HTALP’s Normalized FFO was $0.43 per diluted share and OP Unit, or $96.2 million, compared to $0.42 per diluted share and OP Unit, or $87.1 million for the three months ended September 30, 2019. For the nine months ended September 30, 2020, HTA’s and HTALP’s Normalized FFO was $1.28 per diluted share and OP Unit, or $282.9 million, compared to $1.22 per diluted share and OP Unit, or $255.4 million for the nine months ended September 30, 2019. 32 Table of Contents • For additional information on FFO and Normalized FFO, see “FFO and Normalized FFO” below, which includes a reconciliation to net income attributable to common stockholders/unitholders and an explanation of why we present this non-GAAP financial measure. • For the three months ended September 30, 2020, our NOI was $130.1 million, compared to $121.2 million for the three months ended September 30, 2019. For the nine months ended September 30, 2020, our NOI was $381.6 million, compared to $357.5 million for the nine months ended September 30, 2019. • For the three months ended September 30, 2020, our Same-Property Cash NOI increased 0.5%, or $0.5 million, to $116.2 million, compared to $115.6 million for the three months ended September 30, 2019. For the nine months ended September 30, 2020, our Same-Property Cash NOI increased 1.3%, or $4.4 million, to $345.3 million, compared to $340.9 million for the nine months ended September 30, 2019. • For additional information on our NOI and Same-Property Cash NOI, see “NOI, Cash NOI and Same-Property Cash NOI” below, which includes a reconciliation from net income and an explanation of why we present these non-GAAP financial measures. Key Market Focused Strategy and Investments We believe we have been one of the most active investors in the medical office sector over the last decade. This has enabled us to create a high quality portfolio focused on MOBs serving the future of healthcare with scale and significance in 20 to 25 key markets. • Our investment strategy includes alignment with key healthcare systems, hospitals, and leading academic medical universities. We are the largest owner of on-campus or adjacent MOBs in the country, with approximately 16.7 million square feet of GLA, or 67%, of our portfolio located in these locations. The remaining 33% of our portfolio is located in core community outpatient locations where healthcare is increasingly being delivered. • Over the past decade, our investments have been focused in our 20 to 25 key markets which we believe will outperform the broader U.S. markets from an economic and demographic perspective. As of September 30, 2020, approximately 93% of our portfolio’s GLA is located in the top 75 MSAs. Our key markets represent top MSAs with strong growth metrics in jobs, household income and population, as well as low unemployment and mature healthcare infrastructures. Many of our key markets are also supported by strong university systems. • Our key market focus has enabled us to establish scale across 20 to 25 key markets and effectively utilize our asset management and leasing platform to deliver consistent same store growth and additional yield on investments, as well as cost effective service to tenants. As of September 30, 2020, we had approximately 1 million square feet of GLA in ten of our top 20 markets and approximately 0.5 million square feet of GLA in 17 of our top 20 markets. • During the nine months ended September 30, 2020, we closed on $52.6 million worth of investments primarily located in our existing key markets totaling approximately 214,000 square feet of GLA. Internal Growth through Proactive In-House Property Management and Leasing We believe we have the largest full-service operating platform in the medical office sector that consists of our in-house asset management and leasing platform which allows us to better manage and service our existing portfolio. In each of these markets, we have established a strong in-house asset management and leasing platform that has allowed us to develop valuable relationships with health systems, physician practices, universities, and regional development firms that have led to investment and leasing opportunities for us. Our full-service operating platform has also enabled us to focus on generating cost efficiencies as we gain scale across individual markets and regions. • As of September 30, 2020, our in-house asset management and leasing platform operated approximately 24.3 million square feet of GLA, or 97% of our total portfolio. • As of September 30, 2020, our leased rate (which includes leases which have been executed, but which have not yet commenced) was 90.1% by GLA and our occupancy rate was 89.5% by GLA. • We entered into new and renewal leases on approximately 1.1 million and 3.3 million square feet of GLA, or approximately 4.4% and 13.1%, respectively, of the GLA of our total portfolio, during the three and nine months ended September 30, 2020. • During the three and nine months ended September 30, 2020, tenant retention for the Same-Property portfolio was 89% and 88%, respectively, which included approximately 1.0 million and 3.3 million square feet of GLA of expiring leases, respectively, which we believe is indicative of our commitment to maintaining buildings in desirable locations and fostering strong tenant relationships. Tenant retention is defined as the sum of the total leased GLA of tenants that renewed a lease during the period over the total GLA of leases that renewed or expired during the period. 33 Table of Contents Financial Strategy and Balance Sheet Flexibility • As of September 30, 2020, we had total leverage, measured by debt less cash and cash equivalents to total capitalization, of 32.6%. Total liquidity was approximately $1.5 billion, inclusive of $1.0 billion available on our unsecured revolving credit facility, $277.5 million of forward equity agreements, and cash and cash equivalents of $227.1 million as of September 30, 2020. • As of September 30, 2020, the weighted average remaining term of our debt portfolio was 7.4 years. • During the nine months ended September 30, 2020, we settled a forward sale arrangement pursuant to a forward equity agreement that was entered into in 2019, which included the sale of approximately 1.7 million shares of our common stock for net proceeds of approximately $50.0 million, adjusted for costs to borrow equating to a net price to us of $29.86 per share of common stock. Critical Accounting Policies The complete list of our critical accounting policies was disclosed in our 2019 Annual Report on Form 10-K. Additionally, in light of the COVID-19 pandemic, we believe we have included all relevant information when determining our management estimates and that these estimates are in line with our established policies. For further information on other significant accounting policies that impact us, see Note 2 - Summary of Significant Accounting Policies in the accompanying condensed consolidated financial statements. Recently Issued or Adopted Accounting Pronouncements On January 1, 2020 we adopted ASU 2016-13, Financial Instruments Credit Losses and ASU 2018-13, Fair Value Measurement . For more detail on the implementation and policies of these adoptions or other recently issued accounting pronouncements see Note 2 - Summary of Significant Accounting Policies in the accompanying condensed consolidated financial statements. Factors Which May Influence Results of Operations The current novel coronavirus, or COVID-19 pandemic, and measures taken to slow the spread and lessen its impacts, are having a significant impact on economies and markets worldwide. All our buildings remain in operation, however, some tenants, typically those engaged in the more elective healthcare services, have temporarily suspended operations as a result of precautionary measures or national/local government imposed “stay-at-home” or “shelter-in-place” orders. We have taken steps to enhance our liquidity, in the form of draws against our line of credit, should cash flows become volatile throughout the remainder of the year. As healthcare providers have seen their near-term profitability and liquidity levels decline, we have addressed requests from many of our tenants about their ability to defer payment of a portion of their rents for a limited duration. While many of these requests have been in-bound from tenants, in the interest of strengthening our tenant relations, we have also proactively worked with key health system tenants to seek to help them work through their challenges during this period of time. Each request is evaluated on a case by case basis. In total, we have approved deferral plans that total approximately $11.0 million, of which approximately $3.7 million have been repaid through October 28, 2020. There are no substantial outstanding requests for assistance from tenants. Payments of rent deferrals are generally expected to be repaid within the next 6 to 12 months. As of October 31, 2020, we have not granted unilateral rent forgiveness in connection with our deferral program, however, we may do so in the future if conditions and the specific economics warrant the use of such measures. For the three months ended September 30, 2020, we collected or deferred approximately 99% of our total monthly rents that are contractually due and owed, with cash collection totaling approximately 97% of monthly rents. Our October collections continue to be consistent with Q3. In addition, we have entered into certain lease modifications in the form of early renewals where we provide concessions in the form of free rent, averaging three (3) months at the inception of the lease, in exchange for additional term, on average of approximately three (3) years. The total amount of free rent granted during the nine months ended September 30, 2020 as concessions to early renewals, was approximately $3.6 million, with $2.4 million taken in the three months ended September 30, 2020. Although we did not experience a significant deceleration of cash collections for the three and nine months ended September 30, 2020, because of the evolving situation surrounding the COVID-19 pandemic, our results of operations in Q4 2020 and beyond may be materially impacted as the complete effects of the pandemic, including the decrease in commerce and the slowdown and uncertainty in the broader economy, and the corresponding impacts to our buildings and tenants, come to light. In addition to those noted above, other impacts may take the form of an overall continued decrease in our results of operations, stemming from various factors, including, but not limited to: (a) the inability for us to collect a portion of our rents timely or at all, (b) potential slowdown of new lease leads and signings, (c) decreases in occupancy either from non-renewals or from tenant defaults, (d) potential increases in expenses for vendors, critical supplies or materials, or costs of maintenance activities, (e) delays in construction projects to ready spaces for tenants, (f) delays in development projects and the potential for increased material costs, (g) increased labor costs should we be required to increase salaries for hazardous working conditions, 34 Table of Contents (h) potential impairments should we see a more than temporary reduction in cash flows, (i) potential delays in accretive acquisitions, and (j) increased costs due to borrowings as we look to maintain balance sheet flexibility. Refer to "Results of Operations - Comparison of the Three and Nine Months Ended September 30, 2020 and 2019" for additional details on certain current period impacts from the COVID-19 pandemic. Other than the above, we are not aware of any material trends or uncertainties, other than national economic conditions affecting real estate generally, the risk factors previously discussed in Part I, Item 1A - Risk Factors, in our 2019 Annual Report on Form 10-K, and this Quarterly Report on Form 10-Q under Item 1A. Risk Factors below, that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the investment, management and operation of our properties. Rental Income The amount of rental income generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space and space that will become available from unscheduled lease terminations at the then applicable rental rates. Negative trends in one or more of these factors, including the ultimate collections of such rents, could adversely affect our rental income in future periods. Investment Activity During the nine months ended September 30, 2020, we had investments with an aggregate gross purchase price of $52.9 million. During the nine months ended September 30, 2019, we had investments with an aggregate gross purchase price of $229.9 million. The amount of any future acquisitions or dispositions could have a significant impact on our results of operations in future periods. 35 Table of Contents Results of Operations Comparison of the Three and Nine Months Ended September 30, 2020 and 2019 As of September 30, 2020 and 2019, we owned and operated approximately 25.1 million and 23.7 million square feet of GLA, respectively, with a leased rate of 90.1% and 90.6%, respectively (including leases which have been executed, but which have not yet commenced), and an occupancy rate of 89.5% and 89.7%, respectively. All explanations are applicable to both HTA and HTALP unless otherwise noted. Comparison of the three months ended September 30, 2020 and 2019, respectively, is set forth below (in thousands): Three Months Ended September 30, 2020 2019 Change % Change Revenues: Rental income $ 187,258 $ 174,844 $ 12,414 7.1 % Interest and other operating income 68 160 (92) (57.5) Total revenues 187,326 175,004 12,322 7.0 Expenses: Rental 57,248 53,807 3,441 6.4 General and administrative 10,670 9,788 882 9.0 Transaction 125 522 (397) (76.1) Depreciation and amortization 75,892 73,820 2,072 2.8 Interest expense 23,136 24,625 (1,489) (6.0) Total expenses 167,071 162,562 4,509 2.8 Loss on extinguishment of debt, net (27,726) (21,646) (6,080) (28.1) Income from unconsolidated joint venture 422 422 — — Other income 117 205 (88) (42.9) Net (loss) income $ (6,932) $ (8,577) $ 1,645 (19.2) % NOI $ 130,078 $ 121,197 $ 8,881 7.3 % Same-Property Cash NOI $ 116,180 $ 115,636 $ 544 0.5 % Comparison of the nine months ended September 30, 2020 and 2019, respectively, is set forth below (in thousands): Nine Months Ended September 30, 2020 2019 Change % Change Revenues: Rental income $ 551,459 $ 515,328 $ 36,131 7.0 % Interest and other operating income 488 399 89 22.3 Total revenues 551,947 515,727 36,220 7.0 Expenses: Rental 170,310 158,213 12,097 7.6 General and administrative 32,348 31,157 1,191 3.8 Transaction 297 858 (561) (65.4) Depreciation and amortization 228,484 211,730 16,754 7.9 Interest expense 71,285 72,601 (1,316) (1.8) Total expenses 502,724 474,559 28,165 5.9 Gain (loss) on sale of real estate, net 1,991 (37) 2,028 NM Loss on extinguishment of debt, net (27,726) (21,646) (6,080) (28.1) Income from unconsolidated joint venture 1,223 1,456 (233) (16.0) Other income 290 781 (491) (62.9) Net income $ 25,001 $ 21,722 $ 3,279 15.1 % NOI $ 381,637 $ 357,514 $ 24,123 6.7 % Same-Property Cash NOI $ 345,272 $ 340,858 $ 4,414 1.3 % *NM- not meaningful. 36 Table of Contents Rental Income For the three and nine months ended September 30, 2020 and 2019, respectively, rental income was comprised of the following (in thousands): Three Months Ended September 30, 2020 2019 Change % Change Contractual rental income $ 176,708 $ 166,338 $ 10,370 6.2 % Straight-line rent and amortization of above and (below) market leases 7,298 5,149 2,149 41.7 Other rental revenue 3,252 3,357 (105) (3.1) Total rental income $ 187,258 $ 174,844 $ 12,414 7.1 % Nine Months Ended September 30, 2020 2019 Change % Change Contractual rental income $ 521,175 $ 491,132 $ 30,043 6.1 % Straight-line rent and amortization of above and (below) market leases 19,410 14,034 5,376 38.3 Other rental revenue 10,874 10,162 712 7.0 Total rental income $ 551,459 $ 515,328 $ 36,131 7.0 % Contractual rental income, which includes expense reimbursements, increased $10.4 million and $30.0 million for the three and nine months ended September 30, 2020, compared to the three and nine months ended September 30, 2019, respectively. The increases were primarily due to additional contractual rental income of $9.9 million and $33.1 million from our 2019 and 2020 acquisitions, and contractual rent increases for the three and nine months ended September 30, 2020, respectively. In addition, for the nine months ended September 30, 2020, we recorded a non-recurring charge of $4.7 million of bad debt as a reduction in revenue related to three (3) former tenants currently in litigation and for which we evaluated collectability on an individual basis to determine whether collections continued to be deemed probable. While we fully intend to continue to pursue such collection efforts on amounts owed to us, we recorded this charge due to the recent prevailing economic conditions and resulting uncertainty of the timing and collections of such amounts previously supported by litigation affirmed in our favor and/or the defendant's former credit, which we now believe have recently eroded. Due to the non-routine nature and anticipated non-recurrence of this charge, we have normalized this amount from both Cash NOI and Normalized FFO results as presented in the section entitled "Non-GAAP Financial Measures" below and elsewhere in this document. This can be contrasted with periodic, recurring bad debt that is recorded for tenants either still in occupancy or those having vacated as a result of a tenant default, for which we also ordinarily record a reduction to revenues to account for uncollectible accounts receivable which are not subject to a normalizing adjustment in our Non-GAAP Financial Measures. We believe this latter amount carries similar characteristics of those charges in our results of operations that have a propensity of recurrence as an ongoing reduction of revenue either in the form of uncollectible accounts or as reduced occupancy due to tenant defaults and corresponding vacancy. Average starting and expiring base rents for new and renewal leases consisted of the following for the three and nine months ended September 30, 2020 and 2019, respectively (in thousands, except in average base rents per square foot of GLA): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 New an d renewal leases: Average starting base rents $ 26.45 $ 24.59 $ 27.04 $ 22.23 Average expiring base rents 24.70 23.94 25.84 21.51 Square feet of GLA 1,101 696 3,287 2,596 Lease rates can vary across markets, and lease rates that are considered above or below current market rent may change over time. Leases that expired in 2020 had rents that we believed were at market rates. In general, leasing concessions vary depending on lease type, term and geography. 37 Table of Contents Tenant improvements, leasing commissions and tenant concessions for new and renewal leases consisted of the following for the three and nine months ended September 30, 2020 and 2019, respectively (in per square foot of GLA): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 New leases: Tenant improvements $ 21.02 $ 22.91 $ 38.16 $ 29.95 Leasing commissions 2.05 1.78 2.86 2.01 Tenant concessions 2.59 2.62 3.70 3.79 Renewal leases: Tenant improvements $ 4.43 $ 7.29 $ 5.58 $ 11.14 Leasing commissions 2.07 1.72 2.87 2.01 Tenant concessions 0.94 0.39 1.99 3.79 The average term for new and renewal leases executed consisted of the following for the three and nine months ended September 30, 2020 and 2019, respectively (in years): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 New leases 4.4 6.3 7.9 7.1 Renewal leases 7.7 5.9 5.4 7.4 Rental Expenses For the three months ended September 30, 2020 and 2019, rental expenses attributable to our properties were $57.2 million and $53.8 million, respectively. For the nine months ended September 30, 2020 and 2019, rental expenses attributable to our properties were $170.3 million and $158.2 million, respectively. These increases in rental expenses were primarily due to $3.5 million and $12.3 million of additional rental expenses associated with our 2019 and 2020 acquisitions for the three and nine months ended September 30, 2020, respectively. Furthermore, we recorded an incremental $0.3 million related to hazard pay and increased personal protective equipment costs directly related to COVID-19 for the nine months ended September 30, 2020. Due to the incremental nature related to COVID-19, this amount was normalized out of both NOI and Normalized FFO results as presented below. There was not a substantive amount of incremental costs directly related to COVID-19 for the three months ended September 30, 2020. General and Administrative Expenses For the three months ended September 30, 2020 and 2019, general and administrative expenses were $10.7 million and $9.8 million, respectively. For the nine months ended September 30, 2020 and 2019, general and administrative expenses were $32.3 million and $31.2 million, respectively. These increases were primarily due to an increase in the overall head count due to the continued growth of the Company and stock based compensation expense. Depreciation and Amortization Expense For the three months ended September 30, 2020 and 2019, depreciation and amortization expense was $75.9 million and $73.8 million, respectively. For the nine months ended September 30, 2020 and 2019, depreciation and amortization expense was $228.5 million and $211.7 million, respectively. This increase was associated with our 2019 and 2020 acquisitions, partially offset by buildings we disposed of during 2019. Interest Expense For the three months ended September 30, 2020 and 2019, interest expense was $23.1 million and $24.6 million, respectively. For the nine months ended September 30, 2020 and 2019, interest expense was $71.3 million and $72.6 million, respectively. The decrease in interest expense is primarily due to lower average interest rates on our variable rate debt as compared to the same period in 2019. To achieve our objectives, we borrow at both fixed and variable rates. From time to time, we also enter into derivative financial instruments, such as interest rate swaps, in order to mitigate our interest rate risk on a related financial instrument. We do not enter into derivative or interest rate transactions for speculative purposes. Gain (Loss) on Sale of Real Estate, net For the nine months ended September 30, 2020, we realized a net gain of approximately $2.0 million on the sale of part of our interest in undeveloped land in Miami, Florida. For the nine months ended September 30, 2019, we realized a net loss of $37 thousand on the disposition of three MOB's in Hilton Head, South Carolina. 38 Table of Contents Net Income For the three months ended September 30, 2020 and 2019, net income was $(6.9) million and $(8.6) million, respectively. For the nine months ended September 30, 2020 and 2019, net income was $25.0 million and $21.7 million, respectively. The increase is primarily the result of continued growth in our operations due to accretive acquisitions and improved operating efficiencies. NOI and Same-Property Cash NOI For the three months ended September 30, 2020 and 2019, NOI was $130.1 million and $121.2 million, respectively. For the nine months ended September 30, 2020 and 2019, NOI was $381.6 million and $357.5 million, respectively. The increase in NOI was primarily due to additional NOI from our 2019 and 2020 acquisitions of $7.1 million and $23.6 million for the three and nine months ended September 30, 2020, respectively, partially offset by $0.1 million and $0.4 million of reduced NOI as a result of the buildings we sold during 2019 for the three and nine months ended September 30, 2020, respectively, and a reduction in straight-line rent from properties we owned for more than a year. Same-Property Cash NOI increased 0.5% to $116.2 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. Same-Property Cash NOI increased 1.3% to $345.3 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The increases were primarily the result of rent escalations, improved operating efficiencies, offset by a slight decrease in average occupancy, and the $2.4 million and $3.6 million of incremental free rent provided related to early renewals of leases for the three months and nine months ended September 30, 2020, respectively. Non-GAAP Financial Measures FFO and Normalized FFO We compute FFO in accordance with the current standards established by NAREIT. NAREIT defines FFO as net income or loss attributable to common stockholders/unitholders (computed in accordance with GAAP), excluding gains or losses from sales of real estate property and impairment write-downs of depreciable assets, plus depreciation and amortization related to investments in real estate, and after adjustments for unconsolidated partnerships and joint ventures. Since FFO excludes depreciation and amortization unique to real estate, among other items, it provides a perspective not immediately apparent from net income or loss attributable to common stockholders/unitholders. We also compute Normalized FFO, which excludes from FFO: (i) transaction expenses; (ii) gain or loss on extinguishment of debt; (iii) noncontrolling income or loss from OP Units included in diluted shares (only applicable to the Company); and (iv) other normalizing adjustments, which include items that are unusual and infrequent in nature. Our methodology for calculating Normalized FFO may be different from the methods utilized by other REITs and, accordingly, may not be comparable to other REITs. We present FFO and Normalized FFO because we consider them important supplemental measures of our operating performance and believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of REITs. Historical cost accounting assumes that the value of real estate assets diminishes ratably over time. Since real estate values have historically risen or fallen based on market conditions, many industry investors have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. FFO and Normalized FFO should not be considered as alternatives to net income or loss attributable to common stockholders/unitholders (computed in accordance with GAAP) as indicators of our financial performance, nor are they indicative of cash available to fund cash needs. FFO and Normalized FFO should be reviewed in connection with other GAAP measurements. In addition, the amounts included in the calculation of FFO and Normalized FFO are generally the same for HTALP and HTA, except for net income or loss attributable to common stockholders/unitholders, noncontrolling income or loss from OP Units included in diluted shares (only applicable to the Company) and the weighted average shares of our common stock or HTALP OP Units outstanding. 39 Table of Contents The following is the reconciliation of HTA’s FFO and Normalized FFO to net income attributable to common stockholders for the three and nine months ended September 30, 2020 and 2019, respectively (in thousands, except per share data): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Net (loss) income attributable to common stockholders $ (6,827) $ (8,463) $ 24,563 $ 21,236 Depreciation and amortization expense related to investments in real estate 74,848 73,042 225,354 209,814 (Gain) loss on sale of real estate, net — — (1,991) 37 Proportionate share of joint venture depreciation and amortization 468 468 1,443 1,390 FFO attributable to common stockholders $ 68,489 $ 65,047 $ 249,369 $ 232,477 Transaction expenses 125 522 297 858 Loss on extinguishment of debt, net 27,726 21,646 27,726 21,646 Noncontrolling (loss) income from OP Units included in diluted shares (105) (114) 438 420 Other normalizing adjustments (1) — — 5,031 — Normalized FFO attributable to common stockholders $ 96,235 $ 87,101 $ 282,861 $ 255,401 Net (loss) income attributable to common stockholders per diluted share $ (0.03) $ (0.04) $ 0.11 $ 0.10 FFO adjustments per diluted share, net 0.34 0.35 1.02 1.01 FFO attributable to common stockholders per diluted share $ 0.31 $ 0.31 $ 1.13 $ 1.11 Normalized FFO adjustments per diluted share, net 0.12 0.11 0.15 0.11 Normalized FFO attributable to common stockholders per diluted share $ 0.43 $ 0.42 $ 1.28 $ 1.22 Weighted average diluted common shares outstanding 222,101 209,072 221,521 209,026 (1) Other normalizing adjustments includes the following: Non-recurring bad debt of $4,672 thousand, incremental hazard pay to facilities employees of $314 thousand, and incremental personal protective equipment of $45 thousand for the nine months ended September 30, 2020. There were no other normalizing adjustments for the three months ended September 30, 2020. 40 Table of Contents The following is the reconciliation of HTALP’s FFO and Normalized FFO to net income attributable to common unitholders for the three and nine months ended September 30, 2020 and 2019, respectively (in thousands, except per unit data): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Net (loss) income attributable to common unitholders $ (6,932) $ (8,577) $ 25,001 $ 21,656 Depreciation and amortization expense related to investments in real estate 74,848 73,042 225,354 209,814 (Gain) loss on sale of real estate, net — — (1,991) 37 Proportionate share of joint venture depreciation and amortization 468 468 1,443 1,390 FFO attributable to common unitholders $ 68,384 $ 64,933 $ 249,807 $ 232,897 Transaction expenses 125 522 297 858 Loss on extinguishment of debt, net 27,726 21,646 27,726 21,646 Other normalizing adjustments (1) — — 5,031 — Normalized FFO attributable to common unitholders $ 96,235 $ 87,101 $ 282,861 $ 255,401 Net (loss) income attributable to common unitholders per diluted share $ (0.03) $ (0.04) $ 0.11 $ 0.10 FFO adjustments per diluted OP Unit, net 0.34 0.35 1.02 1.01 FFO attributable to common unitholders per diluted OP Unit $ 0.31 $ 0.31 $ 1.13 $ 1.11 Normalized FFO adjustments per diluted OP Unit, net 0.12 0.11 0.15 0.11 Normalized FFO attributable to common unitholders per diluted OP Unit $ 0.43 $ 0.42 $ 1.28 $ 1.22 Weighted average diluted common OP Units outstanding 222,101 209,164 221,521 209,056 (1) Other normalizing adjustments includes the following: Non-recurring bad debt of $4,672 thousand, incremental hazard pay to facilities employees of $314 thousand, and incremental personal protective equipment of $45 thousand for the nine months ended September 30, 2020. There were no other normalizing adjustments for the three months ended September 30, 2020. NOI, Cash NOI and Same-Property Cash NOI NOI is a non-GAAP financial measure that is defined as net income or loss (computed in accordance with GAAP) before: (i) general and administrative expenses; (ii) transaction expenses; (iii) depreciation and amortization expense; (iv) impairment; (v) interest expense; (vi) gain or loss on sales of real estate; (vii) gain or loss on extinguishment of debt; (viii) income or loss from unconsolidated joint venture; and (ix) other income or expense. We believe that NOI provides an accurate measure of the operating performance of our operating assets because NOI excludes certain items that are not associated with the management of our properties. Additionally, we believe that NOI is a widely accepted measure of comparative operating performance of REITs. However, our use of the term NOI may not be comparable to that of other REITs as they may have different methodologies for computing this amount. NOI should not be considered as an alternative to net income or loss (computed in accordance with GAAP) as an indicator of our financial performance. NOI should be reviewed in connection with other GAAP measurements. Cash NOI is a non-GAAP financial measure which excludes from NO I: (i) straight-line rent adjustments; (ii) amortization of below and above market leases/leasehold interests and other GAAP adjustments; (iii) notes receivable interest inc ome; and (iv) other normalizing adjustments. Contractual base rent, contractual rent increases, contractual rent concessions and changes in occupancy or lease rates upon commencement and expiration of leases are a primary driver of our revenue performance. We believe that Cash NOI, which removes the impact of straight-line rent adjustments, provides another measurement of the operating performance of our operating assets. Additionally, we believe that Cash NOI is a widely accepted measure of comparative operating performance of REITs. However, our use of the term Cash NOI may not be comparable to that of other REITs as they may have different methodologies for computing this amount. Cash NOI should not be considered as an alternative to net income or loss (computed in accordance with GAAP) as an indicator of our financial performance. Cash NOI should be reviewed in connection with other GAAP measurements. To facilitate the comparison of Cash NOI between periods, we calculate comparable amounts for a subset of our owned and operational properties referred to as “Same-Property”. Same-Property Cash NOI excludes (i) properties which have not been owned and operated by us during the entire span of all periods presented and disposed properties, (ii) our share of unconsolidated joint ventures, (iii) development, redevelopment and land parcels, (iv) properties intended for disposition in the near term which have (a) been approved by the Board of Directors, (b) is actively marketed for sale, and (c) an offer has been received at prices we would transact and the sales process is ongoing, and (v) certain non-routine items. Same-Property Cash NOI should not be considered as an alternative to net income or loss (computed in accordance with GAAP) as an indicator of our financial performance. Same-Property Cash NOI should be reviewed in connection with other GAAP measurements. 41 Table of Contents The following is the reconciliation of HTA’s and HTALP’s NOI, Cash NOI and Same-Property Cash NOI to net income for the three and nine months ended September 30, 2020 and 2019, respectively (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Net (loss) income $ (6,932) $ (8,577) $ 25,001 $ 21,722 General and administrative expenses 10,670 9,788 32,348 31,157 Transaction expenses 125 522 297 858 Depreciation and amortization expense 75,892 73,820 228,484 211,730 Interest expense 23,136 24,625 71,285 72,601 (Gain) loss on sale of real estate, net — — (1,991) 37 Loss on extinguishment of debt, net 27,726 21,646 27,726 21,646 Income from unconsolidated joint venture (422) (422) (1,223) (1,456) Other income (117) (205) (290) (781) NOI $ 130,078 $ 121,197 $ 381,637 $ 357,514 Straight-line rent adjustments, net (5,711) (2,539) (12,673) (8,261) Amortization of (below) and above market leases/leasehold interests, net and other GAAP adjustments (1) (113) (1,390) (2,203) (1,872) Notes receivable interest income (11) (23) (152) (75) Other normalizing adjustments (2) — — 5,031 — Cash NOI $ 124,243 $ 117,245 $ 371,640 $ 347,306 Acquisitions not owned/operated for all periods presented and disposed properties Cash NOI (7,938) (928) (26,200) (3,483) Redevelopment Cash NOI 57 (536) 387 (2,468) Intended for sale Cash NOI (182) (145) (555) (497) Same-Property Cash NOI (3) $ 116,180 $ 115,636 $ 345,272 $ 340,858 (1) The presentation includes certain adjustments to allow for the consistent treatment of items impacted by Topic 842-Leases. (2) Other normalizing adjustments includes the following: Non-recurring bad debt of $4,672 thousand, incremental hazard pay to facilities employees of $314 thousand, and incremental personal protective equipment of $45 thousand for the nine months ended September 30, 2020. There were no other normalizing adjustments for the three months ended September 30, 2020. (3) Same-Property includes 417 and 412 buildings for the three and nine months ended September 30, 2020 and 2019, respectively. Liquidity and Capital Resources Our primary sources of cash include: (i) cash flow from operations; (ii) borrowings under our unsecured revolving credit facility; (iii) net proceeds from the issuances of debt and equity securities; and (iv) proceeds from our dispositions. During the next 12 months our primary uses of cash are expected to include: (a) the funding of acquisitions of MOBs, development properties and other facilities that serve the healthcare industry; (b) capital expenditures; (c) the payment of operating expenses; (d) debt service payments, including principal payments; and (e) the payment of dividends to our stockholders. We anticipate cash flow from operations, restricted cash and reserve accounts and our unsecured revolving credit facility, if needed, will be sufficient to fund our operating expenses, capital expenditures and dividends to stockholders. Investments and maturing indebtedness may require funds from borrowings under our unsecured revolving credit facility, the issuance of debt and/or equity securities or proceeds from sales of real estate. During the COVID-19 pandemic, we continue to take a measured approach to our operations and cash flows, with an expectation that despite efforts by the US Government to provide liquidity and relief to certain of our tenants who qualify for aid under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, payments from tenants who do not qualify for such aid, or those medical practices focused on procedures that are of an elective nature, may decline appreciably until such time that there is a sustained reversal of government mandated "stay-at-home" or "shelter-in-place" orders and a corresponding normalized level of economic activity and commerce resumes. In addition, due to the recent volatility in capital markets, our access to such capital may be temporarily delayed, and/or we may not be able to raise debt or equity financing on terms that are favorable to us. As of September 30, 2020, we had total liquidity of $1.5 billion, inclusive of $1.0 billion available on our unsecured revolving credit facility, $277.5 million of forward equity agreements, and cash and cash equivalents of $227.1 million. We believe that we have sufficient liquidity and options at our disposal to sustain operations for the foreseeable future. As the COVID-19 pandemic continues to unfold, we will assess cash flow requirements and deploy various strategies to preserve liquidity, including, but not limited to, continued utilization of our credit facility, settlement of equity raised on a forward basis, or if circumstances warrant, changes to the manner in which our dividends are paid and/or corresponding amounts distributed. 42 Table of Contents As of September 30, 2020, we had unencumbered assets with a gross book value of $7.7 billion. The unencumbered properties may be used as collateral to secure additional financings in future periods or refinance our current debt as it becomes due. Our ability to raise funds from future debt and equity issuances is dependent on our investment grade credit ratings, general economic and market conditions, and our operating performance. When we acquire a property, we prepare a capital plan that contemplates the estimated capital needs of that investment. In addition to operating expenses, capital needs may also include costs of refurbishment, tenant improvements or other major capital expenditures. The capital plan for each investment will be adjusted through ongoing, regular reviews of our portfolio or as necessary to respond to unanticipated additional capital needs. Capital expenditures for the remainder of the year will be primarily targeted towards planned maintenance activities and other capital improvements that are either of an immediate need to preserve liquidity, or strategically necessary for revenue generation purposes. Currently these expenditures are estimated at approximately $10 million to $20 million per quarter, but may fluctuate materially depending on the ongoing impacts from COVID-19. Although we cannot provide assurance that we will not exceed these estimated expenditure levels, we believe our liquidity of $1.5 billion allows us the flexibility to fund such capital expenditures as may be necessary or advisable. If we experience lower occupancy levels, reduced rental rates, reduced revenues as a result of asset sales, or increased capital expenditures and leasing costs compared to historical levels due to competitive market conditions for new and renewal leases, the effect would be a reduction of net cash provided by operating activities. If such a reduction of net cash provided by operating activities is realized, we may have a cash flow deficit in subsequent periods. Our estimate of net cash available is based on various assumptions which are difficult to predict, including the levels of our leasing activity and related leasing costs. Any changes in these assumptions could impact our financial results and our ability to fund working capital and unanticipated cash needs. Cash Flows The following is a summary of our cash flows for the nine months ended September 30, 2020 and 2019, respectively (in thousands): Nine Months Ended September 30, 2020 2019 Change Cash, cash equivalents and restricted cash - beginning of period $ 37,616 $ 133,530 $ (95,914) Net cash provided by operating activities 269,668 238,382 31,286 Net cash used in investing activities (159,919) (295,210) 135,291 Net cash provided by (used in) financing activities 83,881 (58,886) 142,767 Cash, cash equivalents and restricted cash - end of period $ 231,246 $ 17,816 $ 213,430 Net cash provided by operating activities increased in 2020 primarily due to the impact of our 2019 and 2020 acquisitions and contractual rent increases, partially offset by our 2019 and 2020 dispositions and rents that have been deferred under our deferral program in light of COVID-19. We anticipate cash flows from operating activities to increase as a result of the growth in our portfolio through new acquisitions and continued leasing activity in our existing portfolio. For the nine months ended September 30, 2020, net cash used in investing activities primarily related to capital expenditures of $59.0 million, investments in real estate of $52.6 million, development of real estate of $49.5 million, funding of a real estate loan of $6.0 million, partially offset by proceeds from the sale of real estate of $6.4 million. For the nine months ended September 30, 2019, net cash used in investing activities primarily related to investments in real estate of $223.2 million and capital expenditures of $59.5 million. For the nine months ended September 30, 2020, net cash provided by financing activities primarily related to proceeds from unsecured senior notes of $793.6 million and proceeds from issuance of common stock of $50.0 million, partially offset by payments on unsecured senior notes of $300.0 million, dividends paid to holders of our common stock of $205.9 million, payments on our secured mortgage loans of $114.1 million, and net payments on our unsecured revolving credit facility of $100.0 million. For the nine months ended September 30, 2019, net cash used in financing activities primarily related to payments on our unsecured senior notes of $700.0 million, dividends paid to holders of our common stock of $190.9 million, payments on our secured mortgage loans of $96.8 million, and the repurchase and cancellation of common stock of $12.2 million, which was partially offset by proceeds from the issuance of unsecured senior notes of $906.9 million, proceeds from issuance of common stock of $51.8 million and net borrowings on our unsecured revolving credit facility of $15.0 million. 43 Table of Contents Dividends The amount of dividends we pay to our stockholders is determined by our Board of Directors, in their sole discretion, and is dependent on a number of factors, including funds available, our financial condition, capital expenditure requirements and annual dividend distribution requirements needed to maintain our status as a REIT under the Internal Revenue Code of 1986, as amended. We have paid monthly or quarterly dividends since February 2007, and if our investments produce sufficient cash flow, we expect to continue to pay dividends to our stockholders. Because our cash available for dividend distributions in any year may be less than 90% of our taxable income for the year, we may obtain the necessary funds through borrowings, issuing new securities or selling assets to pay out enough of our taxable income to satisfy our dividend distribution requirement. Our organizational documents do not establish a limit on dividends that may constitute a return of capital for federal income tax purposes. The dividend we pay to our stockholders is equal to the distributions received from HTALP in accordance with the terms of the HTALP partnership agreement. It is our intention to continue to pay dividends. However, our Board of Directors may reduce our dividend rate and we cannot guarantee the timing and amount of dividends that we may pay in the future, if any. For the nine months ended September 30, 2020, we paid cash dividends of $205.9 million on our common stock. In October 2020 for the quarter ended September 30, 2020, we paid cash dividends on our common stock of $69.9 million. Financing We have historically maintained a low leveraged balance sheet and intend to continue to maintain this structure in the long term. However, our total leverage may fluctuate on a short-term basis as we execute our business strategy. As of September 30, 2020, our leverage ratio, measured by debt less cash and cash equivalents to total capitalization, was 32.6%. As of September 30, 2020, we had debt outstanding of $3.0 billion and the weighted average interest rate therein was 2.89% per annum, inclusive of the impact of our cash flow hedges. The following is a summary of our unsecured and secured debt. See Note 8 - Debt in the accompanying condensed consolidated financial statements for a further discussion of our debt. Unsecured Revolving Credit Facility As of September 30, 2020, the full $1.0 billion was available on our $1.0 billion unsecured revolving credit facility. Our unsecured revolving credit facility matures in June 2022. Unsecured Term Loans As of September 30, 2020, we had $500.0 million of unsecured term loans outstanding, comprised of $300.0 million under our Unsecured Credit Agreement maturing in 2023, and $200.0 million under our unsecured term loan maturing in 2024. Unsecured Senior Notes As of September 30, 2020, we had $2.55 billion of unsecured senior notes outstanding, comprised of $600.0 million of senior notes maturing in 2026, $500.0 million of senior notes maturing in 2027, $650.0 million of senior notes maturing in 2030 and $800.0 million of senior notes maturing in 2031. Fixed Rate Mortgages During the nine months ended September 30, 2020, we made payments on our fixed rate mortgages of $114.1 million and as of September 30, 2020, we had no fixed rate mortgages outstanding. Commitments and Contingencies There have been no material changes from the commitments and contingencies previously disclosed in our 2019 Annual Report on Form 10-K. Debt Service Requirements We are required by the terms of our applicable loan agreements to meet certain financial covenants, such as minimum net worth and liquidity, and reporting requirements, among others. As of September 30, 2020, we believe that we were in compliance with all such covenants and we are not aware of any covenants that it is reasonably likely that we would not be able to meet in accordance with our loan agreements. Off-Balance Sheet Arrangements As of and during the nine months ended September 30, 2020, we had no material off-balance sheet arrangements that have had or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Inflation We are exposed to inflation risk as income from future long-term leases is the primary source of our cash flows from operations. There are provisions in the majority of our tenant leases that protect us from the impact of normal inflation. These provisions include rent escalations, reimbursement billings for operating expense pass-through charges and real estate tax and insurance reimbursements on a per square foot allowance. However, due to the long-term nature of our leases, among other factors, the leases may not reset frequently enough to cover inflation. 44 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes from the quantitative and qualitative disclosures about market risk previously disclosed in our 2019 Annual Report on Form 10-K.