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 2020 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 2020 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. 29 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 $7.5 billion primarily in MOBs, development projects, land and other healthcare real estate assets consisting of approximately 25.6 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 32 states, with no state having more than 20% of our total GLA as of March 31, 2021. 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 March 31, 2021, 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, Boston, Houston, Miami and Indianapolis being our largest markets by annualized base rent. Company Highlights Portfolio Operating Performance • For the three months ended March 31, 2021, our total revenue was $191.5 million, compared to $185.8 million for the three months ended March 31, 2020. • For the three months ended March 31, 2021, our net income was $22.4 million, compared to $18.2 million, for the three months ended March 31, 2020. • For the three months ended March 31, 2021, our net income attributable to common stockholders was $0.10 per diluted share, or $22.0 million, compared to $0.08 per diluted share, or $17.9 million for the three months ended March 31, 2020. • For the three months ended March 31, 2021, HTA’s FFO, as defined by NAREIT, was $97.8 million, or $0.44 per diluted share, compared to $0.42 per diluted share, or $93.1 million, for the three months ended March 31, 2020. • For the three months ended March 31, 2021, HTALP’s FFO was $98.2 million, or $0.44 per diluted OP Unit, compared to $0.42 per diluted OP unit, or $93.4 million, for the three months ended March 31, 2020. • For the three months ended March 31, 2021, HTA’s and HTALP’s Normalized FFO was $0.44 per diluted share and OP Unit, or $98.3 million, compared to $0.42 per diluted share and OP Unit, or $93.6 million for the three months ended March 31, 2020. • 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 March 31, 2021, our NOI was $131.9 million, compared to $128.9 million for the three months ended March 31, 2020. • For the three months ended March 31, 2021, our Same-Property Cash NOI increased 1.6%, or $1.9 million, to $123.0 million, compared to $121.1 million for the three months ended March 31, 2020. • 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. 30 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 17.2 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 March 31, 2021, 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 March 31, 2021, 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 three months ended March 31, 2021, we closed on $32.5 million worth of investments, primarily located in our existing key markets, totaling approximately 117,000 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 March 31, 2021, our in-house asset management and leasing platform operated approximately 24.7 million square feet of GLA, or 97% of our total portfolio. • As of March 31, 2021, our leased rate (which includes leases which have been executed, but which have not yet commenced) was 89.2% by GLA and our occupancy rate was 87.9% by GLA. • We entered into new and renewal leases on approximately 0.7 million square feet of GLA, or approximately 2.8% of the GLA of our total portfolio, during the three months ended March 31, 2021. • During the three months ended March 31, 2021, tenant retention for the Same-Property portfolio was 66%. 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. Financial Strategy and Balance Sheet Flexibility • As of March 31, 2021, we had total leverage, measured by debt less cash and cash equivalents to total capitalization, of 32.8%. Total liquidity was approximately $1.3 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 $30.0 million as of March 31, 2021. • As of March 31, 2021, the weighted average remaining term of our debt portfolio was 6.9 years. Critical Accounting Policies The complete list of our critical accounting policies was disclosed in our 2020 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 For detail on recently issued accounting pronouncements see Note 2 - Summary of Significant Accounting Policies in the accompanying condensed consolidated financial statements. 31 Table of Contents Factors Which May Influence Results of Operations The novel coronavirus, or COVID-19 pandemic, continues to impact economies and markets worldwide. All our buildings have remained in operation throughout the course of the pandemic. However, we addressed periodic requests from a number of our tenants about their ability to defer payment of a portion of their rents for a limited duration. We evaluated each such request on a case by case basis. In 2020, which is the period that we believe constituted the majority of our COVID-related deferral requests, we approved deferral plans totaling approximately $11.1 million, of which approximately $9.2 million of these deferrals have been repaid through March 31, 2021. There are no substantial outstanding requests for assistance from tenants. Payments of rent deferrals are generally expected to be repaid within the next 3 to 6 months. As of March 31, 2021, 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. In addition, in 2020 we entered into certain lease modifications in the form of early renewals where we provide concessions in the form of free rent, which averaged three months at the inception of the lease, in exchange for additional term, which, averaged approximately three years. During the three months ended March 31, 2021, we have not entered into any material deferral arrangements or early renewal leases with substantive amounts of free rent or other forms of concession at the onset of the lease as a result of COVID-19. Although we did not experience significant disruptions from the COVID-19 pandemic during the three months ended March 31, 2021, 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, increased costs of materials, difficulty in maintaining an active workforce, and constraints on our ability to secure capital or financing, among other factors. Other than the above, we are not aware of any material trends or uncertainties, other than national economic conditions affecting real estate generally and the risk factors previously discussed in Part I, Item 1A - Risk Factors, in our 2020 Annual Report on Form 10-K, 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 three months ended March 31, 2021, we had investments with an aggregate gross purchase price of $32.9 million. During the three months ended March 31, 2020, we had investments with an aggregate gross purchase price of $41.7 million. The amount of any future acquisitions or dispositions could have a significant impact on our results of operations in future periods. 32 Table of Contents Results of Operations Comparison of the Three Months Ended March 31, 2021 and 2020 As of March 31, 2021 and 2020, we owned and operated approximately 25.6 million and 24.9 million square feet of GLA, respectively, with a leased rate of 89.2% and 90.8%, respectively (including leases which have been executed, but which have not yet commenced), and an occupancy rate of 87.9% and 89.9%, respectively. All explanations are applicable to both HTA and HTALP unless otherwise noted. Comparison of the three months ended March 31, 2021 and 2020, respectively, is set forth below (in thousands): Three Months Ended March 31, 2021 2020 Change % Change Revenues: Rental income $ 191,350 $ 185,531 $ 5,819 3.1 % Interest and other operating income 143 245 (102) (41.6) Total revenues 191,493 185,776 5,717 3.1 Expenses: Rental 59,579 56,862 2,717 4.8 General and administrative 10,560 11,518 (958) (8.3) Transaction 96 140 (44) (31.4) Depreciation and amortization 76,274 77,665 (1,391) (1.8) Interest expense 22,986 23,872 (886) (3.7) Total expenses 169,495 170,057 (562) (0.3) Gain on sale of real estate, net — 1,991 (1,991) (100.0) Income from unconsolidated joint venture 392 422 (30) (7.1) Other income 3 76 (73) (96.1) Net income $ 22,393 $ 18,208 $ 4,185 23.0 % NOI $ 131,914 $ 128,914 $ 3,000 2.3 % Same-Property Cash NOI $ 122,990 $ 121,086 $ 1,904 1.6 % Rental Income For the three months ended March 31, 2021 and 2020, respectively, rental income was comprised of the following (in thousands): Three Months Ended March 31, 2021 2020 Change % Change Contractual rental income $ 182,512 $ 175,839 $ 6,673 3.8 % Straight-line rent and amortization of above and (below) market leases 5,247 6,094 (847) (13.9) Other rental revenue 3,591 3,598 (7) (0.2) Total rental income $ 191,350 $ 185,531 $ 5,819 3.1 % Contractual rental income, which includes expense reimbursements, increased $6.7 million for the three months ended March 31, 2021, compared to the three months ended March 31, 2020. The increase was primarily due to additional contractual rental income of $4.3 million from our 2020 and 2021 acquisitions, and contractual rent increases for the three months ended March 31, 2021. Average starting and expiring base rents for new and renewal leases consisted of the following for the three months ended March 31, 2021 and 2020, respectively (in thousands, except in average base rents per square foot of GLA): Three Months Ended March 31, 2021 2020 New an d renewal leases: Average starting base rents $ 24.75 $ 25.37 Average expiring base rents 22.99 24.99 Square feet of GLA 705 885 33 Table of Contents 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 2021 had rents that we believed were at market rates. In general, leasing concessions vary depending on lease type, term, geography, and supply/demand dynamics. Tenant improvements, leasing commissions and tenant concessions for new and renewal leases consisted of the following for the three months ended March 31, 2021 and 2020, respectively (in per square foot of GLA): Three Months Ended March 31, 2021 2020 New leases: Tenant improvements $ 22.34 $ 36.09 Leasing commissions 3.63 2.51 Tenant concessions 7.14 5.11 Renewal leases: Tenant improvements $ 5.03 $ 6.26 Leasing commissions 2.21 3.70 Tenant concessions 0.16 0.60 The average term for new and renewal leases executed consisted of the following for the three months ended March 31, 2021 and 2020, respectively (in years): Three Months Ended March 31, 2021 2020 New leases 4.4 9.9 Renewal leases 4.2 4.5 Rental Expenses For the three months ended March 31, 2021 and 2020, rental expenses attributable to our properties were $59.6 million and $56.9 million, respectively. The increase in rental expenses was primarily due to $1.3 million of additional rental expenses associated with our 2020 and 2021 acquisitions for the three months ended March 31, 2021, with the remainder of the increase primarily due to increased expenses from weather-related events experienced during the quarter. General and Administrative Expenses For the three months ended March 31, 2021 and 2020, general and administrative expenses were $10.6 million and $11.5 million, respectively. The decrease was primarily due to a reduction in corporate overhead expenses. Depreciation and Amortization Expense For the three months ended March 31, 2021 and 2020, depreciation and amortization expense was $76.3 million and $77.7 million, respectively. This increase was associated with our 2020 and 2021 acquisitions, partially offset by buildings we disposed of during 2020. Interest Expense For the three months ended March 31, 2021 and 2020, interest expense was $23.0 million and $23.9 million, respectively. The decrease in interest expense is primarily due to lower average interest rates as compared to the same period in 2020. 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 on Sale of Real Estate, net We had no sales of real estate assets during the three months ended March 31, 2021. For the three months ended March 31, 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. Net Income For the three months ended March 31, 2021 and 2020, net income was $22.4 million and $18.2 million, respectively. The increase is primarily the result of continued growth in our operations due to accretive acquisitions and improved operating efficiencies. 34 Table of Contents NOI and Same-Property Cash NOI For the three months ended March 31, 2021 and 2020, NOI was $131.9 million and $128.9 million, respectively. The increase in NOI was primarily due to additional NOI from our 2020 and 2021 acquisitions of $3.2 million for the three months ended March 31, 2021, partially offset by $0.2 million of reduced NOI as a result of the buildings we sold during 2020 for the three months ended March 31, 2021, and a reduction in straight-line rent from properties we owned for more than a year. Same-Property Cash NOI increased 1.6% to $123.0 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The increases were primarily the result of rent escalations, improved operating efficiencies, and 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. The following is the reconciliation of HTA’s FFO and Normalized FFO to net income attributable to common stockholders for the three months ended March 31, 2021 and 2020, respectively (in thousands, except per share data): Three Months Ended March 31, 2021 2020 Net income attributable to common stockholders $ 22,030 $ 17,901 Depreciation and amortization expense related to investments in real estate 75,331 76,737 Gain on sale of real estate, net — (1,991) Proportionate share of joint venture depreciation and amortization 488 467 FFO attributable to common stockholders $ 97,849 $ 93,114 Transaction expenses 96 140 Noncontrolling income from OP Units included in diluted shares 363 307 Normalized FFO attributable to common stockholders $ 98,308 $ 93,561 Net income attributable to common stockholders per diluted share $ 0.10 $ 0.08 FFO adjustments per diluted share, net 0.34 0.34 FFO attributable to common stockholders per diluted share $ 0.44 $ 0.42 Normalized FFO adjustments per diluted share, net 0.00 0.00 Normalized FFO attributable to common stockholders per diluted share $ 0.44 $ 0.42 Weighted average diluted common shares outstanding 222,268 220,623 35 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 months ended March 31, 2021 and 2020, respectively (in thousands, except per unit data): Three Months Ended March 31, 2021 2020 Net income attributable to common unitholders $ 22,393 $ 18,208 Depreciation and amortization expense related to investments in real estate 75,331 76,737 Gain on sale of real estate, net — (1,991) Proportionate share of joint venture depreciation and amortization 488 467 FFO attributable to common unitholders $ 98,212 $ 93,421 Transaction expenses 96 140 Normalized FFO attributable to common unitholders $ 98,308 $ 93,561 Net income attributable to common unitholders per diluted share $ 0.10 $ 0.08 FFO adjustments per diluted OP Unit, net 0.34 0.34 FFO attributable to common unitholders per diluted OP Unit $ 0.44 $ 0.42 Normalized FFO adjustments per diluted OP Unit, net 0.00 0.00 Normalized FFO attributable to common unitholders per diluted OP Unit $ 0.44 $ 0.42 Weighted average diluted common OP Units outstanding 222,268 220,623 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. 36 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 months ended March 31, 2021 and 2020, respectively (in thousands): Three Months Ended March 31, 2021 2020 Net income $ 22,393 $ 18,208 General and administrative expenses 10,560 11,518 Transaction expenses 96 140 Depreciation and amortization expense 76,274 77,665 Interest expense 22,986 23,872 Gain on sale of real estate, net — (1,991) Income from unconsolidated joint venture (392) (422) Other income (3) (76) NOI $ 131,914 $ 128,914 Straight-line rent adjustments, net (3,774) (3,245) Amortization of (below) and above market leases/leasehold interests, net and other GAAP adjustments (475) (1,699) Notes receivable interest income (6) (138) Cash NOI $ 127,659 $ 123,832 Acquisitions not owned/operated for all periods presented and disposed properties Cash NOI (3,378) (565) Redevelopment Cash NOI (410) (914) Intended for sale Cash NOI (881) (1,267) Same-Property Cash NOI (1) $ 122,990 $ 121,086 (1) Same-Property includes 429 buildings for the three months ended March 31, 2021 and 2020, 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. As of March 31, 2021, we had total liquidity of $1.3 billion, inclusive of $1.0 billion available on our unsecured revolving credit facility, $277.5 million of unsettled forward equity agreements, and cash and cash equivalents of $30.0 million. We believe that we have sufficient liquidity and opportunities to obtain additional liquidity at our disposal to sustain operations for the foreseeable future. As of March 31, 2021, we had unencumbered assets with a gross book value of $8.0 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 $15 million to $20 million per quarter. Although we cannot provide assurance that we will not exceed these estimated expenditure levels, we believe our liquidity of $1.3 billion allows us the flexibility to fund such capital expenditures as may be necessary or advisable. 37 Table of Contents 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 three months ended March 31, 2021 and 2020, respectively (in thousands): Three Months Ended March 31, 2021 2020 Change Cash, cash equivalents and restricted cash - beginning of period $ 118,765 $ 37,616 $ 81,149 Net cash provided by operating activities 65,353 75,421 (10,068) Net cash used in investing activities (76,299) (76,623) 324 Net cash (used in) provided by financing activities (74,733) 185,058 (259,791) Cash, cash equivalents and restricted cash - end of period $ 33,086 $ 221,472 $ (188,386) Net cash provided by operating activities decreased in 2021 primarily due to the impact of our 2020 and 2021 acquisitions and contractual rent increases offset by our 2020 dispositions. 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 three months ended March 31, 2021, net cash used in investing activities primarily related to investments in real estate of $30.5 million, capital expenditures of $28.9 million, and development of real estate of $17.1 million. For the three months ended March 31, 2020, net cash used in investing activities primarily related to investments in real estate of $41.3 million, capital expenditures of $23.8 million, development of real estate of $12.1 million, and 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 three months ended March 31, 2021, net cash used in financing activities primarily related to dividends paid to holders of our common stock of $70.0 million and the repurchase and cancellation of common stock of $3.2 million. For the three months ended March 31, 2020, net cash provided by financing activities primarily related to net borrowings on our unsecured credit facility of $305.0 million and proceeds from issuance of common stock of $50.0 million, offset by payments on our secured mortgage loans of $95.6 million, dividends paid to holders of our common stock of $68.2 million, and the repurchase and cancellation of common stock of $4.6 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 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 three months ended March 31, 2021, we paid cash dividends of $70.0 million on our common stock. In April 2021 for the quarter ended March 31, 2021, we paid cash dividends on our common stock of $70.0 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 March 31, 2021, our leverage ratio, measured by debt less cash and cash equivalents to total capitalization, was 32.8%. As of March 31, 2021, 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. 38 Table of Contents Unsecured Revolving Credit Facility As of March 31, 2021, 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 March 31, 2021, 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 March 31, 2021, 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. Commitments and Contingencies There have been no material changes from the commitments and contingencies previously disclosed in our 2020 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 March 31, 2021, 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 three months ended March 31, 2021, 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. 39 Table of Contents