Healthcare Realty Trust Inc 10-K

Item 7. 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 consolidated financial statements and notes appearing elsewhere in this Annual Report. Such consolidated financial statements and information have been prepared to reflect HTA and HTALP’s financial position as of December 31, 2020 and 2019, together with results of operations and cash flows for the years ended December 31, 2020, 2019 and 2018. 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; • Contractual Obligations; • Off-Balance Sheet Arrangements; and • Inflation. Forward-Looking Statements Certain statements contained in this Annual 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 of 1933, as amended (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 Annual Report is filed with the SEC. We cannot guarantee the accuracy of any such forward-looking statements contained in this Annual 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 are included herein and other filings with the SEC. 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 44 Table of Contents forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to projections over time, except as required by law. 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 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 our 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 $7.5 billion primarily in MOBs, development projects, land and other healthcare real estate assets consisting of approximately 25.4 million square feet of GLA throughout the U.S. Approximately 67% of our portfolio was located on the campuses of, or adjacent to, nationally and regionally recognized healthcare systems. Our portfolio is diversified geographically across 32 states, with no state having more than 20% of our total GLA as of December 31, 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 December 31, 2020, we had approximately 1 million square feet of GLA in ten of our top 20 key markets and approximately 94% of our portfolio, based on GLA, is located in the top 75 MSAs, with Dallas, Houston, Boston, Tampa and Hartford/New Haven being our largest markets by investment. Company Highlights Portfolio Operating Performance • For the year ended December 31, 2020, total revenue increased 6.8%, or $46.9 million, to $739.0 million, compared to $692.0 million for the year ended December 31, 2019. • For the year ended December 31, 2020, net income was $53.5 million, compared to $30.8 million for the year ended December 31, 2019. • For the year ended December 31, 2020, net income attributable to common stockholders was $0.24 per diluted share, or $52.6 million, compared to $0.14 per diluted share, or $30.2 million, for the year ended December 31, 2019. • For the year ended December 31, 2020, HTA’s FFO, as defined by NAREIT, was $344.7 million, or $1.56 per diluted share, compared to $1.53 per diluted share, or $319.7 million, for the year ended December 31, 2019. • For the year ended December 31, 2020, HTALP’s FFO, as defined by NAREIT, was $345.6 million, or $1.56 per diluted OP Unit, compared to $1.53 per diluted OP Unit, or $320.3 million, for the year ended December 31, 2019. • For the year ended December 31, 2020, HTA’s and HTALP’s Normalized FFO was $1.71 per diluted share and OP Unit, or $379.3 million, compared to $1.64 per diluted share and OP Unit, or $344.3 million, for the year ended December 31, 2019. • 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 year ended December 31, 2020, NOI increased 6.6%, or $31.5 million, to $512.1 million, compared to $480.6 million for the year ended December 31, 2019. • For the year ended December 31, 2020, Same-Property Cash NOI increased 1.6%, or $7.2 million, to $457.1 million, compared to $449.9 million for the year ended December 31, 2019. • For additional information on 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. 45 Table of Contents 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 17.0 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 last several years, our investments have been focused in our 20 to 25 key markets which we believe will outperform the broader U.S. from an economic and demographic perspective. As of December 31, 2020, approximately 94% 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 and effectively utilize our asset management and leasing platform to deliver consistent same store growth and additional yield on investments, and also cost effective service to tenants. As of December 31, 2020, we had approximately 1 million square feet of GLA in ten of our top 20 key markets and approximately 0.5 million square feet of GLA in 17 of our top 20 key markets. We expect to establish this scale across 20 to 25 key markets as our portfolio expands. • During the year ended December 31, 2020, HTA closed on approximately$191.7 million of investments totaling approximately 600,000 square feet of GLA, with expected year-one contractual MOB yields of approximately 6.0%. These properties were approximately 94% leased as of closing, and are located within HTA's key markets. • During the year ended December 31, 2020, we completed the disposition of one MOB located in Kansas City for an aggregate gross sales price of $16.8 million, representing approximately 69,000 square feet of GLA, and generating net gains of approximately $7.6 million. Additionally, during the year ended December 31, 2020, we sold part of our interest in undeveloped land in Miami, Florida for a gross sales price of $7.6 million, which resulted in a net gain of approximately $2.0 million. • During the year ended December 31, 2020, we completed the initial development started by HTA. This 127,000 SF Class A MOB development in Raleigh, North Carolina is currently 77% leased. HTA continued to develop three new on-campus MOBs located in the key markets of Miami, Florida; Bakersfield, California; and Dallas, Texas. In total, HTA has development projects in process of approximately $110 million, totaling approximately 244,000 square feet of GLA, and that are expected to be more than 79% pre-leased upon completion. Additionally, during 2020, HTA continued to redevelop two MOBs located in Los Angeles, California with estimated costs of approximately $20 million and totaling approximately 105,000 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 property management and leasing functions 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. 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 December 31, 2020, our in-house asset management and leasing platform operated approximately 24.6 million square feet of GLA, or 97% of our total portfolio, a significant increase from 8.8 million square feet, or 70%, of GLA managed in-house in 2012. • As of December 31, 2020, our leased rate (which includes leases which have been executed, but which have not yet commenced) was 89.8% by GLA, and our occupancy rate was 89.1% by GLA. • We entered into new and renewal leases on approximately 3.9 million square feet of GLA, or 15.2% of the GLA of our total portfolio, during the year ended December 31, 2020. • During the year ended December 31, 2020, tenant retention for the Same-Property portfolio was 87%, which included approximately 3.8 million square feet of GLA of expiring leases, 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. 46 Table of Contents Financial Strategy and Balance Sheet Flexibility • As of December 31, 2020, we had total leverage, measured by debt less cash and cash equivalents to total capitalization, of 32.3%. Total liquidity was $1.4 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 $115.4 million as of December 31, 2020. • As of December 31, 2020, the weighted average remaining term of our debt portfolio was 7.2 years. • During the year ended December 31, 2020, we paid down approximately $114.1 million of outstanding secured mortgage loans, resulting in our elimination of any secured borrowings. Although not anticipated, we may finance transactions with secured borrowings or acquire buildings and assume debt if required or economically beneficial. • In September 2020, our Board of Directors approved a stock repurchase plan authorizing us to purchase up to $300.0 million of our common stock from time to time prior to the expiration thereof on September 23, 2023. As of December 31, 2020, the remaining amount of common stock available for repurchase under the stock repurchase plan was $300.0 million. • In November 2019, we refreshed our at the market ("ATM") offering program of common stock for an additional aggregate sales amount of up to $750.0 million. This program remains active as of December 31, 2020. Upon expiration, it is our intention to refresh the existing ATM program or establish a new ATM offering program. • During the year ended December 31, 2020, we issued approximately 1.7 million shares of our common stock under our ATM program 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. Additionally, we have four outstanding forward sale arrangements pursuant to forward equity agreements, with anticipated net proceeds of $277.5 million, and with an average share price of $29.46, subject to adjustments as provided in the forward equity agreements. All four of these forward sale arrangements mature in accordance with their applicable contract terms by the middle of 2021, however, the agreements provide for mechanisms to extend settlement upon mutual agreement by us and the counterparty/distribution agent. Critical Accounting Policies The preparation of financial statements in conformity with GAAP requires our management to use judgment in the application of accounting principles, including making estimates. We base our estimates on experience and various other assumptions we believe are reasonable under the circumstances. These estimates affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting periods. However, if our judgment or interpretation of the facts and circumstances relating to the various transactions or other matters had been different, it is possible that different accounting would have been applied, resulting in different presentation of our financial statements. We periodically reevaluate our estimates and in the event they prove to be different from actual results, we make adjustments in subsequent periods to reflect more current estimates about matters that are inherently uncertain. Below is a discussion of accounting policies that we consider critical as they may require more complex judgment in their application or require estimates about matters that are inherently uncertain. For further information on significant accounting policies that impact us, see Note 2 - Summary of Significant Accounting Policies in the accompanying consolidated financial statements in Part IV, Item 15. Basis of Presentation Our accompanying consolidated financial statements include our accounts and those of our wholly-owned subsidiaries and joint venture entities in which we own a majority interest with the ability control operations. We consolidate variable interest entities (“VIEs”) when we are the primary beneficiary. All inter-company balances and transactions have been eliminated in the accompanying consolidated financial statements. We make judgments with respect to our level of influence or control and whether we are (or are not) the primary beneficiary of a VIE. Consideration of various factors include, but are not limited to, our ability to direct the activities that most significantly impact the entity’s economic performance, our form or ownership interest, our representation on the entity’s governing body, the size and seniority of our investment, our ability and rights of other investors to participate in policy making decisions, replace the manager and/or liquidate the entity, if applicable. Our ability to correctly assess our influence or control over an entity when determining the primary beneficiary of a VIE affects the presentation of these entities in our consolidated financial statements. If we perform a primary beneficiary analysis at a date other than at inception of the VIE, our assumptions may be different and may result in the identification of a different primary beneficiary. Revenue Recognition Rental revenue is our primary source of revenue. At the inception of a new lease we assess the terms and conditions to determine proper classification. If the estimates utilized by us in our assessment were different, then our lease classification for 47 Table of Contents accounting purposes may have been different, which could impact the timing and amount of revenue recognized. We recognize rental revenue from operating leases on a straight-line basis over the term of the related lease (including rent holidays). Tenant reimbursement revenue, which is comprised of additional amounts recoverable from tenants for common area maintenance expenses and certain other recoverable expenses, is recognized as revenue in the period in which the related expenses are incurred. Effective January 1, 2018, with the adoption of Topic 606 - Revenue from Contracts with Customers, the revenue recognition process is based on a five-step model to account for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. Topic 606 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For more detailed information on Topic 606, see Note 2 - Summary of Significant Accounting Policies to the accompanying consolidated financial statements in Part IV, Item 15. Leases In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-02, codified as ASC 842 - Leases (Topic 842). This new standard superseded ASC Topic 840 and states that companies will be required to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. Topic 842 requires qualitative and quantitative disclosures to supplement the amounts recorded in the financial statements so that users can understand the nature of the entity’s leasing activities, including significant judgments and changes in judgments. As a lessor, we lease space in our MOBs primarily to medical enterprises. The assets underlying these leases consist of buildings and associated land which are included as real estate investments on our accompanying consolidated balance sheets. All of our leases for which we are the lessor are classified as operating leases under Topic 842. Leases, for which we are the lessee, are classified as separate components on our accompanying consolidated balance sheets. Operating leases are included as right-of-use (“ROU”) assets - operating leases, net, with a corresponding lease liability - operating leases. Financing leases are included in receivables and other assets, net with a corresponding lease liability in security deposits, prepaid rent and other liabilities. A lease liability is recognized for our obligation related to the lease and an ROU asset represents our right to use the underlying asset over the lease term. For more detailed information on Topic 842, see Note 2 - Summary of Significant Accounting Policies to the accompanying consolidated financial statements in Part IV, Item 15. Investments in Real Estate With the adoption of ASU 2017-01 in January 2017, the majority of our investments in real estate investments have been accounted for as asset acquisitions and we record the purchase price to tangible and intangible assets and liabilities based on their relative fair values. Tangible assets primarily consist of land and buildings and improvements. Additionally, the purchase price includes acquisition related expenses, above or below market leases, above or below market leasehold interests, in place leases, tenant relationships, above or below market debt assumed, interest rate swaps assumed and any contingent consideration recorded when the contingency is resolved. The determination of the fair value requires us to make certain estimates and assumptions. The fair value of the land and buildings and improvements is based upon our determination of the value of the property as if it were to be replaced or as if it were vacant using discounted cash flow models similar to those used by market participants. Factors considered by us include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. The value of in place leases is based on our evaluation of the specific characteristics of each tenant’s lease. The factors considered include estimated lease-up periods, market rent and other market conditions. We analyze the acquired leases to determine whether the rental rates are above or below market. The value associated with above or below market leases is based upon the present value (using a discount rate which reflects the risks associated with the acquired leases) of the difference between (i) the contractual amounts to be received pursuant to the lease over its remaining term and (ii) our estimate of the amounts that would be received using fair market rates over the remaining term of the lease. We analyze the acquired leasehold interests to determine whether the rental rates are above or below market. The value associated with above or below market leasehold interests is based upon the present value (using a discount rate which reflects the risks associated with the acquired leases) of the difference between (i) the contractual amounts to be paid pursuant to the lease over its remaining term and (ii) our estimate of the amounts that would be paid using fair market rates over the remaining term of the lease. We record debt or interest rate swaps assumed at fair value. The amount of above or below market debt is determined based upon the present value of the difference between the cash flow stream of the assumed mortgage and the cash flow stream of a market rate mortgage. The value of interest rate swaps is based upon a discounted cash flow analysis on the expected cash flows, taking into account interest rate curves and the period to maturity. 48 Table of Contents We are required to make certain estimates in order to determine the fair value of the tangible and intangible assets and liabilities acquired in a business investment. Our assumptions directly impact our results of operations, as amounts allocated to certain assets and liabilities have different depreciation and amortization lives. In addition, the amortization and depreciation of these assets and liabilities are recorded in different line items in our accompanying consolidated statements of operations. Recoverability of Real Estate Investments Real estate investments are evaluated for potential impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Impairment losses are recorded when indicators of impairment are present and the carrying amount of the asset is greater than the sum of future undiscounted cash flows expected to be generated by that asset over the remaining expected holding period. We would recognize an impairment loss when the carrying amount is not recoverable to the extent the carrying amount exceeds the fair value of the property. The fair value is generally based on discounted cash flow analyses. In performing the analysis we utilize a variety of methodologies, including undiscounted cash flow models for certain properties that meet quantitative and/or qualitative thresholds. Our methodology contemplates in-place cash flows from existing tenants, with certain assumptions for future anticipated occupancy levels, lease-up and absorption periods after known or estimated vacating tenants, inflationary adjustments for rents and operating expenses, market lease assumptions based on in-place rents and comparative properties' rates, ordinary tenant concessions, such as free rent, and planned tenant improvement and maintenance or other capital expenditures, as well as other initial direct costs, such as leasing commissions paid to third-parties. We also utilize capitalization rates to arrive at a final value of our property, less estimated selling costs. Further, we also will consider executed sales agreements or management’s best estimate of market comparables in arriving at our total undiscounted cash flows. Recently Issued or Adopted Accounting Pronouncements See Note 2 - Summary of Significant Accounting Policies in the accompanying consolidated financial statements in Part IV, Item 15 for a discussion of recently issued or adopted accounting pronouncements. Factors Which May Influence Results of Operations The economic uncertainty created by the COVID-19 pandemic and the potential for new strains of SARS-CoV-2 or entirely new types of viruses and/or global propagation of communicable disease continue to present risks to the Company and the future results of our operations. Should current and planned measures, including further development and delivery of vaccines and other measures intended to reduce or eliminate the spread of COVID-19, past and/or proposed economic stimulus, and other laws, acts and orders proposed or enacted by federal, state and local agencies or foreign governments, ultimately not be successful or limited in their efficacy, our business and the broader real estate industry may experience significant adverse consequences. These consequences include loss of revenues, increased expenses, difficulty in maintaining an active workforce, and constraints on our ability to secure capital or financing, among other factors. Please refer to Part I, Item 1A - Risk Factors for a comprehensive summary of these and other risks associated with pandemics and other health concerns. We are not aware of any other material trends or uncertainties, other than national economic conditions affecting real estate generally and the risk factors previously listed in Part I, Item 1A - Risk Factors, 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 tenant vacancies or unscheduled lease terminations at the then applicable rental rates. Negative trends in one or more of these factors could adversely affect our rental income in future periods. Investment Activity During the years ended December 31, 2020, 2019 and 2018, we had investments with an aggregate purchase price of $191.7 million, $560.5 million and $17.8 million, respectively. During the years ended December 31, 2020, 2019 and 2018, we had dispositions with an aggregate gross sales price of $24.3 million, $4.9 million and $308.6 million, respectively. The amount of any future acquisitions or dispositions could have a significant impact on our results of operations in future periods. 49 Table of Contents Results of Operations Comparison of the Years Ended December 31, 2020 and 2019 As of December 31, 2020 and 2019, we owned and operated approximately 25.4 million and 24.8 million square feet of GLA, respectively, with a leased rate of 89.8% and 90.8%, respectively (which includes leases which have been executed, but which have not yet commenced), and an occupancy rate of 89.1% and 89.9%, respectively. All explanations are applicable to both HTA and HTALP unless otherwise noted. Comparison of the years ended December 31, 2020 and 2019, respectively, is set forth below: Year Ended December 31, 2020 2019 Change % Change Revenues: Rental income $ 738,414 $ 691,527 $ 46,887 6.8 % Interest and other operating income 551 513 38 7.4 Total revenues 738,965 692,040 46,925 6.8 Expenses: Rental 226,859 211,479 15,380 7.3 General and administrative 42,969 41,360 1,609 3.9 Transaction 965 2,350 (1,385) (58.9) Depreciation and amortization 303,828 290,384 13,444 4.6 Interest expense 94,613 96,632 (2,019) (2.1) Total expenses 669,234 642,205 27,029 4.2 Gain (loss) on sale of real estate, net 9,590 (154) 9,744 NM Loss on extinguishment of debt, net (27,726) (21,646) (6,080) (28.1) Income from unconsolidated joint venture 1,612 1,882 (270) (14.3) Other income 301 841 (540) (64.2) Net income $ 53,508 $ 30,758 $ 22,750 74.0 % NOI $ 512,106 $ 480,561 $ 31,545 6.6 % Same-Property Cash NOI $ 457,087 $ 449,850 $ 7,237 1.6 % Comparison of the years ended December 31, 2019 and 2018, respectively, and related discussions can be found in the Item 7. MD&A section under the Results of Operations header in our Annual Report on Form 10-K as filed on February 18, 2020 for the year ended December 31, 2019 which is herein incorporated by reference. Rental Income For the years ended December 31, 2020 and 2019, respectively, rental income was comprised of the following (in thousands): Year Ended December 31, 2020 2019 Change % Change Contractual rental income $ 698,962 $ 658,231 $ 40,731 6.2 % Straight-line rent and amortization of above and (below) market leases 24,115 18,653 5,462 29.3 Other rental revenue 15,337 14,643 694 4.7 Total rental income $ 738,414 $ 691,527 $ 46,887 6.8 % Contractual rental income, which includes expense reimbursements, increased $40.7 million for the year ended December 31, 2020, compared to the year ended December 31, 2019. The increase was primarily due to $40.1 million of additional contractual rental income from our 2019 and 2020 acquisitions, and contractual rent increases for the year ended December 31, 2020. 50 Table of Contents Average starting and expiring base rents for new and renewal leases consisted of the following for the years ended December 31, 2020 and 2019, respectively (in thousands, except in average base rents per square foot of GLA): Year Ended December 31, 2020 2019 New an d renewal leases: Average starting base rents $ 27.22 $ 24.18 Average expiring base rents 25.64 23.37 Square feet of GLA 3,865 3,608 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 and term. Tenant improvements, leasing commissions and tenant concessions for new and renewal leases consisted of the following for the years ended December 31, 2020 and 2019, respectively (in per square foot of GLA): Year Ended December 31, 2020 2019 New leases: Tenant improvements $ 38.75 $ 30.65 Leasing commissions 3.51 3.16 Tenant concessions 3.70 3.63 Renewal leases: Tenant improvements $ 5.26 $ 11.55 Leasing commissions 2.77 2.26 Tenant concessions 1.76 0.50 The average term for new and renewal leases executed consisted of the following for the years ended December 31, 2020 and 2019, respectively (in years): Year Ended December 31, 2020 2019 New leases 7.6 7.3 Renewal leases 5.3 7.2 Rental Expenses For the years ended December 31, 2020 and 2019, rental expenses attributable to our properties were $226.9 million and $211.5 million, respectively. The increase in rental expenses is primarily due to $15.2 million of additional rental expenses associated with our 2019 and 2020 acquisitions for the year ended December 31, 2020. General and Administrative Expenses For the years ended December 31, 2020 and 2019 general and administrative expenses were $43.0 million and $41.4 million, respectively. These increases were primarily due to inflationary salary adjustments and normal annual vendor increases. General and administrative expenses include such costs as salaries, corporate overhead and professional fees, among other items. Transaction Expenses For the years ended December 31, 2020 and 2019, transaction expenses were $1.0 million and $2.4 million, respectively. The decrease in 2020 compared to 2019 was primarily due to decreased acquisition activity in 2020 as compared to 2019. Depreciation and Amortization Expense For the years ended December 31, 2020 and 2019, depreciation and amortization expense was $303.8 million and $290.4 million, respectively. These increases were associated with our 2019 and 2020 investments, partially offset by buildings we sold during 2019 and 2020. Interest Expense Interest expense decreased by $2.0 million during the year ended December 31, 2020 compared to 2019. For the year ended December 31, 2020, the decrease was primarily due to lower average interest rates as compared to 2019 and the payoff of secured mortgage loans. 51 Table of Contents 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 For the year ended December 31, 2020, we realized a net gain of $9.6 million from the disposition of one MOB located in Kansas as well as the sale of part of our interest in undeveloped land in Miami, Florida. For the year ended December 31, 2019, we realized a net loss on the sale of real estate of $0.2 million from the disposition of four MOBs located in South Carolina and New Mexico. See Note 4 - Dispositions and Impairment in the accompanying consolidated financial statements in Part IV, Item 15 for more detail on the dispositions. Loss on Extinguishment of Debt For the years ended December 31, 2020 and 2019, we realized a net loss on the extinguishment of debt of $27.7 million and $21.6 million, respectively, related to make-whole provisions in the redemption of senior unsecured notes. Net Income Net income increased $22.7 million to $53.5 million for the year ended December 31, 2020, compared to $30.8 million for the year ended December 31, 2019. This increase was primarily the result of continued new investment activity, growth in operations and improved operating efficiencies. NOI and Same-Property Cash NOI NOI increased $31.5 million to $512.1 million for the year ended December 31, 2020, compared to the year ended December 31, 2019. The increase was primarily due to $28.0 million of additional NOI from our 2019 and 2020 acquisitions for the year ended December 31, 2020. Same-Property Cash NOI increased $7.2 million, or 1.6%, to $457.1 million for the year ended December 31, 2020, compared to $449.9 million for the year ended December 31, 2019. These increases were primarily the result of contractual rent escalations and improved operating efficiencies offset by a slight decrease in average occupancy. 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. I 52 Table of Contents The following is the reconciliation of HTA’s FFO and Normalized FFO to net income attributable to common stockholders for the years ended December 31, 2020 and 2019, respectively (in thousands, except per share data): Year Ended December 31, 2020 2019 Net income attributable to common stockholders $ 52,618 $ 30,154 Depreciation and amortization expense related to investments in real estate 299,722 287,572 (Gain) loss on sale of real estate, net (9,590) 154 Proportionate share of joint venture depreciation and amortization 1,949 1,858 FFO attributable to common stockholders $ 344,699 $ 319,738 Transaction expenses 965 2,350 Loss on extinguishment of debt, net 27,726 21,646 Noncontrolling income from OP Units included in diluted shares 890 538 Other normalizing adjustments (1) 5,031 — Normalized FFO attributable to common stockholders $ 379,311 $ 344,272 Net income attributable to common stockholders per diluted share $ 0.24 $ 0.14 FFO adjustments per diluted share, net 1.32 1.39 FFO attributable to common stockholders per diluted share $ 1.56 $ 1.53 Normalized FFO adjustments per diluted share, net 0.15 0.11 Normalized FFO attributable to common stockholders per diluted share $ 1.71 $ 1.64 Weighted average diluted common shares outstanding 221,666 209,605 (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 year ended December 31, 2020. 53 Table of Contents The following is the reconciliation of HTALP’s FFO and Normalized FFO to net income attributable to common unitholders for the years ended December 31, 2020 and 2019, respectively (in thousands, except per unit data): Year Ended December 31, 2020 2019 Net income attributable to common OP unitholders $ 53,508 $ 30,692 Depreciation and amortization expense related to investments in real estate 299,722 287,572 (Gain) loss on sale of real estate, net (9,590) 154 Proportionate share of joint venture depreciation and amortization 1,949 1,858 FFO attributable to common OP unitholders $ 345,589 $ 320,276 Transaction expenses 965 2,350 Loss on extinguishment of debt, net 27,726 21,646 Other normalizing adjustments (1) 5,031 — Normalized FFO attributable to common OP unitholders $ 379,311 $ 344,272 Net income attributable to common OP unitholders per diluted OP unit $ 0.24 $ 0.15 FFO adjustments per diluted OP unit, net 1.32 1.38 FFO attributable to common OP unitholders per diluted OP unit $ 1.56 $ 1.53 Normalized FFO adjustments per diluted OP unit, net 0.15 0.11 Normalized FFO attributable to common OP unitholders per diluted OP unit $ 1.71 $ 1.64 Weighted average diluted common OP units outstanding 221,666 209,605 (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 year ended December 31, 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. 54 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 years ended December 31, 2020 and 2019, respectively (in thousands): Year Ended December 31, 2020 2019 Net income $ 53,508 $ 30,758 General and administrative expenses 42,969 41,360 Transaction expenses 965 2,350 Depreciation and amortization expense 303,828 290,384 Interest expense 94,613 96,632 (Gain) loss on sale of real estate, net (9,590) 154 Loss on extinguishment of debt, net 27,726 21,646 Income from unconsolidated joint venture (1,612) (1,882) Other income (301) (841) NOI $ 512,106 $ 480,561 Straight-line rent adjustments, net (15,971) (9,861) Amortization of (below) and above market leases/leasehold interests, net and other GAAP adjustments (1) (2,722) (3,347) Notes receivable interest income (161) (96) Other normalizing adjustments (2) 5,031 — Cash NOI $ 498,283 $ 467,257 The following is the reconciliation of HTA’s and HTALP’s Same-Property Cash NOI to Cash NOI for the years ended December 31, 2020 and 2019, respectively (in thousands): Year Ended December 31, 2020 2019 Cash NOI $ 498,283 $ 467,257 Acquisitions not owned/operated for all periods presented and disposed properties Cash NOI (36,408) (9,273) Redevelopment Cash NOI 698 (2,635) Intended for sale Cash NOI (5,486) (5,499) Same-Property Cash NOI (3) $ 457,087 $ 449,850 (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 year ended December 31, 2020. (3) Same-Property includes 399 buildings for the years ended December 31, 2020 and 2019. 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 the issuance of debt and/or equity securities or proceeds from sales of real estate. As of December 31, 2020, we had liquidity of $1.4 billion, including $1.0 billion available under our unsecured revolving credit facility, $277.5 million of forward equity agreements, and $115.4 million of cash and cash equivalents. In addition, we had unencumbered assets with a gross book value of $7.9 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. 55 Table of Contents 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. As of December 31, 2020, we estimate that our expenditures for capital improvements for 2021 will range from $85 million to $95 million depending on leasing activity. Although we cannot provide assurance that we will not exceed these estimated expenditure levels, our liquidity of $1.4 billion allows us the flexibility to fund such capital expenditures. 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 years ended December 31, 2020, 2019 and 2018, respectively (in thousands): Year Ended December 31, Current Year Change Prior Year Change 2020 2019 2018 Cash, cash equivalents and restricted cash - beginning of year $ 37,616 $ 133,530 $ 118,560 $ (95,914) $ 14,970 Net cash provided by operating activities 387,962 340,394 337,396 47,568 2,998 Net cash (used in) provided by investing activities (319,260) (667,289) 176,309 348,029 (843,598) Net cash provided by (used in) financing activities 12,447 230,981 (498,735) (218,534) 729,716 Cash, cash equivalents and restricted cash - end of year $ 118,765 $ 37,616 $ 133,530 $ 81,149 $ (95,914) Net cash provided by operating activities increased in 2020 primarily due to the impact of our 2020 and 2019 acquisitions, contractual rent increases and improved operating efficiencies. We anticipate cash flows from operating activities to increase as a result of the above items and continued leasing activity in our existing portfolio. For the year ended December 31, 2020, net cash used in investing activities primarily related to the investment in real estate of $185.3 million, capital expenditures of $74.7 million and development costs of $77.1 million, partially offset by proceeds from the sale of real estate of $22.9 million. For the year ended December 31, 2019, net cash used in investing activities primarily related to investments in real estate of $553.3 million, capital expenditures of $91.5 million and development costs of $28.1 million, partially offset by proceeds from the sale of real estate of $4.9 million. For the year ended December 31, 2018, net cash provided by investing activities primarily related to proceeds from the sale of real estate of $305.1 million, which was partially offset by capital expenditures of $77.9 million and development of costs of $34.3 million. For the year ended December 31, 2020, net cash provided by financing activities primarily related to the proceeds from unsecured senior notes of $793.6 million and net proceeds of shares of common stock issued of $50.0 million, offset by payments on our unsecured senior notes of $300.0 million, dividends paid to holders of our common stock of $275.8 million, payments on our secured mortgage loans of $114.1 million, net payments under our revolving credit facility of $100.0 million, and the repurchase and cancellation of common stock of $5.2 million. For the year ended December 31, 2019, net cash provided financing activities primarily related to the proceeds from unsecured senior notes of $906.9 million, net proceeds of shares of common stock issued of $323.4 million, and net borrowings under our revolving credit facility of $100.0 million which was partially offset by payments on our unsecured senior notes of $700.0 million, dividends paid to holders of our common stock of $256.1 million, payments on our secured mortgage loans of $97.4 million, and repurchase and cancellation of our common stock of $12.2 million. For the year ended December 31, 2018, net cash used in financing activities primarily related to dividends paid to holders of our common stock of $252.7 million, payments on our secured mortgage loans of $241.0 million, and the repurchases of our common stock of $70.3 million, which was partially offset by net proceeds of shares of common stock issued of $72.8 million. 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 56 Table of Contents 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 year ended December 31, 2020, we paid cash dividends of $275.8 million on our common stock. In January 2021, we paid cash dividends on our common stock of $70.0 million for the quarter ended December 31, 2020. 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 December 31, 2020, our leverage ratio, measured by debt less cash and cash equivalents to total capitalization, was 32.3%. As of December 31, 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 consolidated financial statements in Part IV, Item 15 for a further discussion of our debt. Unsecured Revolving Credit Facility As of December 31, 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 December 31, 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 December 31, 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 year ended December 31, 2020, we made payments on our fixed rate mortgages of $114.1 million and as of December 31, 2020, we had no fixed rate mortgages outstanding. Commitments and Contingencies See Note 10 - Commitments and Contingencies in the accompanying consolidated financial statements in Part IV, Item 15 for a further discussion of our commitments and contingencies. 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 December 31, 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. 57 Table of Contents Contractual Obligations The table below presents our obligations and commitments to make future payments under our debt obligations and lease agreements as of December 31, 2020 (in thousands): Payment Due by Period Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Total Debt $ — $ 300,000 $ 200,000 $ 2,550,000 $ 3,050,000 Interest (1) 81,433 160,916 152,007 237,175 631,531 Ground lease and other operating lease obligations 11,045 22,621 20,946 642,671 697,283 Total $ 92,478 $ 483,537 $ 372,953 $ 3,429,846 $ 4,378,814 (1) Interest on variable rate debt is calculated using the forward rates in effect at December 31, 2020 and excludes the impact of our interest rate swaps. Forward rates do not contemplate the transition of LIBOR to Secured Overnight Financing Rate or other rate to be used in the calculation of interest amounts. Any differences between LIBOR and alternative rates are not deemed to be material. Off-Balance Sheet Arrangements As of and during the year ended December 31, 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, other than operating lease arrangements consisting primarily of ground leases which as of December 31, 2020 were not carried on our consolidated balance sheets. 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.