Item 1. Business
Item 1. Business
BUSINESS OVERVIEW
HTA, a Maryland corporation, and HTALP, a Delaware limited partnership, were incorporated or formed, as applicable, on April 20, 2006.
HTA is a publicly-traded REIT and is the largest dedicated owner and operator of medical office buildings (“MOBs”) in the United States (“U.S.”). We focus on owning and operating MOBs that serve the future of healthcare delivery and are located on health system campuses, near university medical centers, or in community core outpatient locations. We also focus on key markets that have attractive demographics 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 enhance the value of our real estate assets through our dedicated asset management and leasing platform, which generates consistent revenue streams and manageable expenses. As a result of our core business strategy, we seek to generate stockholder value through consistent and growing dividends, which are attainable through sustainable cash flows.
We invest in MOBs that we believe are critical to the delivery of healthcare in a changing environment. Healthcare is one of the fastest growing segments of the U.S. economy, with an expected average growth rate of approximately 6% annually through 2028. Overall U.S. spending is expected to increase by approximately 20% of gross domestic product (“GDP”) by 2028 according to the U.S. Centers for Medicare & Medicaid Services. In addition, healthcare is experiencing the fastest employment growth in the U.S., a trend that is expected to continue over the next decade. These high levels of demand are primarily driven by an aging U.S. population and the long-term impact of an increasing number of insured individuals nationwide. This increase in demand, combined with advances in less invasive medical procedures, is driving many healthcare services to lower costs and to more convenient outpatient settings that are less reliant on hospital campuses. As a result, HTA believes that well-located MOBs should provide stable cash flows with relatively low vacancy risk, resulting in consistent long-term growth.
Since inception, the Company has invested $7.8 billion primarily in MOBs, development projects, land and other healthcare real estate assets that are primarily located in 20 to 25 high quality markets that possess above average economic and socioeconomic drivers. Our portfolio consists of approximately 26.1 million square feet of gross leasable area (“GLA”) throughout the U.S. As of December 31, 2021, approximately 67% of our portfolio was located on the campuses of, or adjacent to, nationally and regionally recognized healthcare systems. We believe these key locations and affiliations create significant demand from healthcare related tenants for our properties. Further, our portfolio is primarily concentrated within major U.S. metropolitan statistical areas (“MSAs”) that we believe will provide above-average economic growth and socioeconomic benefits over the coming years. As of December 31, 2021, we had approximately 1 million square feet of GLA in ten of our top 20 key markets and approximately 95% of our portfolio, based on GLA, is located in the top 75 MSAs, with Dallas, Houston, Boston, Atlanta and Miami being our largest markets by investment.
Our principal executive office is located at 16435 North Scottsdale Road, Suite 320, Scottsdale, AZ 85254, and our telephone number is (480) 998-3478. We maintain a website at www.htareit.com where additional information about us can be accessed. The contents of our website are not incorporated by reference in, or otherwise a part of this filing. We make our periodic and current reports, as well as any amendments to such reports, available free of charge at www.htareit.com as soon as reasonably practicable after such materials are electronically filed with the SEC. These reports are also available in hard copy to any stockholder upon request by contacting our investor relations staff at the number above or via email at info@htareit.com.
HIGHLIGHTS
Earnings
• For the year ended December 31, 2021, total revenue increased 3.8%, or $28.1 million, to $767.1 million, compared to $739.0 million for the year ended December 31, 2020.
• For the year ended December 31, 2021, net income increased by $46.3 million, to $99.8 million, compared to $53.5 million for the year ended December 31, 2020.
• For the year ended December 31, 2021, net income attributable to common stockholders was $0.44 per diluted share, or $98.0 million, compared to $0.24 per diluted share, or $52.6 million, for the year ended December 31, 2020.
• For the year ended December 31, 2021, HTA’s FFO, as defined by NAREIT, was $386.4 million, or $1.72 per diluted share, compared to $1.56 per diluted share, or $344.7 million, for the year ended December 31, 2020.
• For the year ended December 31, 2021, HTALP’s FFO, as defined by NAREIT, was $388.2 million, or $1.73 per diluted OP Unit, compared to $1.56 per diluted OP Unit, or $345.6 million, for the year ended December 31, 2020.
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• For the year ended December 31, 2021, HTA’s and HTALP’s Normalized FFO was a record $1.75 per diluted share and OP Unit, or $391.8 million, compared to $1.71 per diluted share and OP Unit, or $379.3 million, for the year ended December 31, 2020, an increase of 2.3%.
• 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 financial measure which is not a financial measure based on generally accepted accounting principles (“GAAP”).
• For the year ended December 31, 2021, Net Operating Income (“NOI”) increased 3.5%, or $18.1 million, to $530.2 million, compared to $512.1 million for the year ended December 31, 2020.
• For the year ended December 31, 2021, Same-Property Cash NOI increased 1.7%, or $7.8 million, to $460.8 million, compared to $453.0 million for the year ended December 31, 2020.
• 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.
Portfolio Performance
• As of December 31, 2021, our leased rate (which includes leases which have been executed, but which have not yet commenced) was 89.3% by GLA, and our occupancy rate was 87.5% by GLA. The leased rate for our Same-Property portfolio was 90.1%.
• During the year ended December 31, 2021, we executed 2.8 million square feet of GLA of new and renewal leases, or 10.8%, of the total GLA of our portfolio. Re-leasing spreads increased to 2.0% and tenant retention continued to be strong at 74% for the Same-Property portfolio as of December 31, 2021. 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.
• For the year ended December 31, 2021, HTA closed on approximately $308.8 million of MOB investments totaling approximately 960,000 square feet of GLA, with expected year-one contractual yields of approximately 5.7%. These properties were approximately 85% leased as of closing, and are located within HTA's key markets. In addition, HTA funded approximately $80 million for MOB development projects in Texas and North Carolina, which includes funding of loan commitments and investments in development joint ventures.
• During 2021, HTA had the following development and redevelopment activity:
◦ Completed: During 2021, HTA completed the development of three new on-campus MOBs located in the key markets of Miami, Florida; Bakersfield, California; and Dallas, Texas. Total construction costs on these developments were approximately $110 million and totaled approximately 245,000 square feet of GLA and are currently 78% leased.
◦ Development pipeline: HTA's development pipeline consists of five projects in the pre-leasing process, totaling over 850,000 square feet of GLA. These projects are located in Houston, Orlando and Raleigh and are highlighted by HTA's previously announced strategic partnership with Medistar Corporation to co-develop the Texas A&M Innovation Plaza - Horizon Tower located in Houston, Texas, a 485,000 square foot medical office and life sciences tower with anticipated costs of $215 million expected to commence construction in 2022.
◦ Redevelopments: During 2021, HTA continued to redevelop two MOBs located in Los Angeles, California with estimated costs of approximately $22 million and totaling approximately 104,000 square feet of GLA. In addition, HTA began redevelopment of one MOB located in Houston, Texas with estimated costs of approximately $7 million and 49,000 square feet of GLA.
• During the year ended December 31, 2021, HTA completed the disposition of fifteen MOBs for an aggregate gross sales price of $88.3 million, representing approximately 599,000 square feet of total GLA, and generating a net gain of approximately $39.2 million.
Capital Asset and Liquidity
• During the year ended December 31, 2021, we remained focused on positioning our balance sheet to be poised for future investments. In October 2021, we refinanced our $1.3 billion unsecured credit agreement, lowering borrowing costs and extending maturities to October 2025.
• As of December 31, 2021, we had total leverage, measured as debt less cash and cash equivalents to total capitalization, of 27.7%. Total liquidity was $1.1 billion, inclusive of $1.0 billion available on our unsecured revolving credit facility and cash and cash equivalents of $52.4 million as of December 31, 2021.
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• During 2021, HTA issued approximately 9.4 million shares of common stock under its at-the-market (“ATM”) offering program for net proceeds of approximately $251.3 million, adjusted for costs to borrow.
• For the year ended December 31, 2021, we declared dividends of $1.29 per share of common stock. This marks the 8th consecutive year of dividend increases to our stockholders.
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BUSINESS STRATEGIES
Corporate Strategies
Invest in and Maintain a Portfolio of Properties that are Valuable for the Future of Healthcare Delivery
The Company is focused on investing in and maintaining a real estate portfolio that consists of well-located MOBs that allow for the efficient delivery of healthcare over the long-term. To date, we have invested $7.8 billion to create one of the largest portfolios (based on GLA) of healthcare real estate that is focused on the MOB sector in the U.S. We intend to allocate capital to properties that exhibit the following key attributes:
• Located on the campuses of, or aligned with, nationally and regionally recognized healthcare systems in the U.S . We seek to invest in properties that we believe have long-term value for healthcare providers, including those that benefit from their proximity to and/or affiliation with prominent healthcare systems. These healthcare systems typically possess high credit quality and are capable of investing capital into their campuses. We believe our affiliations with these health systems helps ensure long-term tenant demand. As of December 31, 2021, approximately 67% of our portfolio was located on the campuses of, or adjacent to, nationally and regionally recognized healthcare systems.
• Located in core community outpatient locations . We seek to invest in properties that we believe will have long-term value for healthcare providers, including those that are located in key outpatient medical hubs. These properties benefit from their proximity to attractive patient populations, maintain a mix of physician practices and specialties, and are convenient for patients and physicians alike. In addition, these properties and medical hubs can be centers for healthcare away from hospital campuses while benefiting from the advancement of healthcare technology, which allow for lower cost settings, more services and procedures to be performed away from hospitals, and the growing requirement for convenient healthcare. We believe these factors support long-term tenant demand. At December 31, 2021, approximately 33% of our portfolio was located in core community outpatient locations.
• Attractive markets where we can maximize efficiencies through our asset management and leasing platform . We seek to own MOBs in markets that we believe possess attractive demographics, economic growth and high barriers to entry which support growing tenant demand. We have developed a strong presence across 20 to 25 key markets since our inception, with approximately 95% of our total GLA located in the top 75 MSAs as of December 31, 2021. In addition, we have developed scale in these key markets, reaching 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. Our scale in markets has allowed us to create the largest, institutionally owned asset management platform in the sector, which includes leasing, property management, building maintenance, construction, and development capabilities. In each of these markets, we have established a strong full-service operating platform that has allowed us to develop valuable relationships with health systems, physician practices, universities and regional development companies that have led to investment and leasing opportunities for us. Our asset management platform utilizes our scale to provide services to our properties at cost effective rates and with a focus on generating cost efficiencies and superior service for our tenants.
• Occupied with limited near term leasing risks . We seek to invest in and maintain well-occupied properties that we believe are critical to the delivery of healthcare within that specific market. As of December 31, 2021, our portfolio was 89.3% leased. We believe this creates tenant demand that supports higher occupancy and drives strong, long-term tenant retention as hospitals and physicians are generally reluctant to move or relocate, as evidenced by our Same-Property portfolio tenant retention rate of 74% as of the year ended December 31, 2021.
• Diversified and synergistic mix of tenants . Our primary focus is placed on ensuring an appropriate and diversified mix of tenants from different practice types, as well as complimentary practices that provide synergies within both individual buildings and the broader health system campuses. We actively invest in both multi-tenant properties, which generally have shorter-term leases in smaller spaces, and single-tenant properties, which generally have longer-term leases in larger spaces. The multi-tenant buildings typically provide for lower lease rollover risks in any particular year and typically allow rents to reset to current market rates that may be higher than the in-place rental rates. We believe single-tenant buildings provide steady long-term cash flow, but generally provide for more limited long-term growth.
• Credit-worthy tenants . Our primary tenants are healthcare systems, university medical centers and leading physician groups. These groups typically have strong and stable financial performance, which we believe helps ensure stability in our long-term rental income and tenant retention. As of December 31, 2021, 58% of our annual base rent was derived from credit-rated tenants, primarily health systems. A significant amount of our remaining rent comes from physician groups and medical healthcare system tenants that are credit-worthy based on our internal underwriting and due diligence, but do not have the size to benefit from a formal credit rating by a nationally recognized rating agency.
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Key Market Focused Strategy and Investments
We plan to continue to grow externally through targeted investments and developments that improve the quality of our portfolio and are accretive to our cost of capital. To achieve this growth in competitive markets we seek:
• Targeted property investments, generally located within our key markets where we have in-place scale where we expect to see continued growth and synergies. These transactions allow us to focus on the quality of individual properties and to seek to ensure that they are accretive to our cost of capital.
• Long-term relationships with key industry participants. We will continue our emphasis on long-term relationship building as we have since inception. These relationships are cultivated by our senior management team with key industry participants, including health systems as well as local and regional developers, each of whom have traditionally provided us with valuable investment opportunities.
• Local knowledge through our internal full-service operating platform. Our local personnel participate in local industry activities that can provide insights and access to potential opportunities.
Internal Growth through Proactive In-House Property Management and Leasing
Our asset management and leasing platform manages directly approximately 25.1 million square feet of GLA, or 96% of our total portfolio. This is a significant increase since our public listing on the New York Stock Exchange (“NYSE”) in 2012 when we managed directly approximately 8.8 million square feet, or 70%, of our GLA. We believe this direct asset management approach allows us to maximize our internal growth by improving occupancy, achieving operating efficiencies and creating long-term tenant relationships at our properties, resulting in optimized rental rates. Specific components of our overall asset management strategy include:
• Maintaining regional offices in markets where we have a significant presence. HTA has 31 local offices primarily located within our key markets across the U.S., including our corporate headquarters in Scottsdale, Arizona.
• Creating local relationships with local healthcare providers, including national and regional healthcare systems, physicians and other providers.
• Maintaining or increasing our average rental rates, actively leasing vacant space and reducing leasing concessions. These leasing results contributed to an average of 1.8% of Same-Property Cash NOI growth each quarter during the year ended December 31, 2021.
• Improving the quality of service provided to our tenants by being attentive to their needs, managing expenses and strategically investing capital to remain competitive within our markets. During the year ended December 31, 2021, we achieved tenant retention for the Same-Property portfolio of 74%.
• Maintaining a portfolio of high-quality MOBs that we believe are critical to the delivery of healthcare now and in the future, while enhancing our reputation as a dedicated leading MOB owner and operator.
• Utilizing local and regional economies of scale to focus on operating cost efficiencies for our properties and utilizing our building service operations to generate profits for our stockholders while providing more efficient services.
Actively Maintain Conservative Capital Structure
We have and continue to actively manage our balance sheet to maintain an attractive investment grade credit rating, to maintain conservative leverage and to preserve financing flexibility, which ultimately hedges against inherent risk and provides us with attractive capital sources that allow us to take advantage of strategic external growth opportunities. In addition, we may also strategically dispose of properties that we believe no longer align with our strategic growth objectives in order to redeploy the capital generated by these dispositions into higher yielding MOBs that we believe have better longer-term growth prospects. The strength of our balance sheet is demonstrated by our investment grade credit ratings. To maintain our strong and conservative balance sheet, we:
• Maintain a low leverage ratio. Our leverage ratio, measured as debt less cash and cash equivalents to total capitalization, was 27.7% as of December 31, 2021.
• Maintain a high level of liquidity. As of December 31, 2021, we had approximately $1.1 billion of liquidity, primarily consisting of $1.0 billion available on our unsecured revolving credit facility and $52.4 million of cash and cash equivalents.
• Utilize multiple capital sources, including public debt and equity, and unsecured bank loans.
• Maintain well-laddered debt maturities, which extend through 2031 with no significant exposure in any one year. As of December 31, 2021, the weighted average remaining term of our debt portfolio was 6.6 years.
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HEALTHCARE INDUSTRY
Healthcare Sector Growth
We operate MOBs within the ever-changing healthcare industry, which is affected by population, technology, legislation and the economy. Over the last several years, the healthcare industry has benefited from several significant macroeconomic drivers, such as an aging population, millennials beginning to form families, and an increase in the insured population. These trends are driving growth in healthcare spending at a rate significantly faster than the rate of growth in the broader U.S. economy.
Population Changes
The U.S. population is experiencing significant aging of its population, as advancements in medical technology and changes in treatment methods enable people to live longer. As the U.S. population continues to age, the share of Americans aged 65 and older is projected to represent over 20% of the population by 2030, which represents a 31% increase between 2020 and 2030. This is expected to drive healthcare utilization higher as individuals consume more healthcare as they age.
Individuals of this age spend the highest amounts on healthcare, averaging approximately $6,700 per individual over the age of 65 according to a 2020 Consumer Expenditure Survey. This compares to healthcare expenditures of approximately $1,400 per year for individuals 25 and under. The older population group will increasingly require treatment and management of chronic and acute health ailments. We believe much of this increased care will take place in lower cost outpatient settings, which we believe should continue to support MOB demand in the long term. In addition, the large millennial generation is just now starting to reach their thirties and form families. During this age period, healthcare expenditures double on average. As this large generation utilizes additional healthcare services, it is expected they will do so in more convenient outpatient settings, typically in MOBs.
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Baby Boomers
The “silver tsunami” of aging baby boomers is poised to shift demographics so much so that people aged 65 and older are projected to outnumber those under 18 by 2035. This shift is likely to increase demand for healthcare services as well as investment in and development of medical office buildings. For adults 65 and over, attitudes towards healthcare access tend to be characterized by tradition, loyalty and resistance to change. This generation has shown to be least interested in virtual visits, the least likely to switch primary care physicians, and the most likely to make healthcare decisions based on hospital affiliation. Baby boomers may also make retirement choices that affect relative demand for healthcare resources, with many expected to migrate to preferred states for retirement, including Florida, Arizona, North Carolina, California and Texas.
As America’s largest generation continues to age, Medicare also becomes part of the conversation. Currently, the percentage of Medicare-eligible beneficiaries enrolled in Medicare Advantage is increasing at an all-time high. By 2025, it is predicted that Medicare Advantage enrollees will reach nearly 30 million beneficiaries (40% of all Medicare patients). Hospitals who receive payment from Medicare Advantage plans will likely invest in supplemental benefits and outpatient services in order to manage population health, avoid unnecessary hospitalizations, and thus keep costs down.
Millennials
Aside from the baby boomer generation, another group whose preferences are shaping the healthcare market is the millennial generation. For these consumers, decisions are shaped by a desire for easily accessible and affordable care. Millennials are not brand loyal, and instead prioritize free visits and other forms of savings over quality (assuming this is standard). They desire both after-hours access to clinics and the ability to make same-day appointments – many times also willing to consider virtual visits to receive same-day care.
Healthcare Spending
The healthcare sector is one of the fastest growing sectors of the U.S. economy and is growing faster than GDP. According to the latest data from 2020, Americans spent over $4.1 trillion, or 19.7%, of total GDP, on healthcare expenditures in 2020, an increase of 8.7% over the previous year. The U.S. Centers for Medicare & Medicaid Services project that total healthcare expenditures will reach approximately $6.0 trillion by 2028. Healthcare expenditures are projected to grow an average of 5.2% annually through 2028 and account for 19.7% of GDP by 2028. This growth in healthcare expenditures reflects the increasing demand for healthcare. It is also driving demand for cost effective healthcare which generally takes place in outpatient settings such as MOBs.
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Increases in healthcare spending may be driven by several factors, including changes in patient volumes, increases in per-patient spending, and general price increases. Historically, all three have factored into growing healthcare spending. However, increasing costs of new medical technology, leading to increased prices for healthcare goods and services, along with increasing Medicare enrollment, are two factors seen to play the largest role in healthcare spending projections.
Healthcare costs continue to be a burden to U.S. families and factor into care-seeking decisions for the majority of the population. Growth in healthcare costs has driven government legislation, consumer demand for lower-cost healthcare settings, and the increased presence of market disruptors and mergers and acquisitions in the healthcare space. From a consumer’s perspective, shifting healthcare utilization to the lower-cost outpatient setting is an approachable option that can directly impact out-of-pocket costs. The effects of the novel coronavirus disease (“COVID-19”) have only exacerbated this shift, with more people avoiding the hospital setting whenever possible.
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Outpatient Trends
Hospitals have traditionally been central to the delivery of healthcare, with medical office buildings serving as physician office space, and for other lower acuity purposes often relative to proximity to a hospital campus. However, volume mix is shifting toward outpatient, lower-cost sites, including those outside of hospital-controlled proprieties, due in-part to cost savings, patient preference and technological advances. Outpatient services are expected to grow by approximately 13% over the next five years.
Medical Office Buildings
We believe hospitals will continue their focus on high-acuity care, leaving lower-acuity care and administrative work to other locations, further segmenting the care delivery space. Going forward, outpatient facilities may be grouped to increase efficiency for patients and will also likely be spread out in retail locations that come with parking, visibility and accessibility.
Ambulatory Surgery Centers
In motion long before COVID-19 heightened regulators’ interest, the movement toward lower-cost care settings such as ambulatory surgery centers (“ASC”) will continue to be an important area of focus. Seeking care at ASCs rather than hospitals is often more convenient for patients and allows them to be discharged within the day, which can reduce infection risk and promote an at-home recovery. Beyond convenience, ASCs are less costly to both patients and payers, likely a strong driver of this shift in care-delivery setting.
The COVID-19 pandemic has accelerated the shift toward ASCs. An increased focus on hospital capacity meant hospitals were pushing lower-acuity procedures to the outpatient setting to retain space for emergencies and COVID-19 cases. At the same time, apprehension to set foot in the hospital has caused patients to seek outpatient care instead. There were several announcements of ASC expansion and large transactions involving ASC organizations in 2021 including acquisitions by large health systems.
This shift has resulted in Medicare updating the number of reimbursable procedures that can be performed at ASCs. Beginning in March 2022, Medicare will allow the nomination of surgical procedures to be added to the ASC covered procedures list. This regulatory landscape, combined with other market pressures and changing preferences, results in an expected annual revenue growth rate of 6.9% for ASCs. The expected growth of the ASC market is predicted to lead to future consolidation, acquisitions, and competition for providers.
ASCs are expected to grow in orthopedics, cardiovascular, pain management, urology, and other specialties. Diagnostic services are expected to continue shifting from hospitals toward outpatient sites. Due to competition, outpatient imaging and lab services can be lower-cost alternatives as compared to their equivalent hospital-based services.
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For 2021, Centers for Medicare & Medicaid Services ("CMS") added eleven new procedures to the list of ambulatory surgery center covered surgical procedures. Additionally, CMS is increasing payment rates for certain qualifying ASCs resulting in a total estimated payment increase of approximately $120 million to ASCs for 2021 compared to 2020 Medicare payments, further supporting the shift of healthcare delivery to outpatient settings. By 2021, the volume of procedures performed in ASCs is expected to increase by 35% when compared to 2015.
Urgent Care Centers
Another change in healthcare seeking behaviors is the sustained shift from hospital emergency room visits to urgent care centers. Much of the emphasis on this is due to a need to move non-emergent care out of the emergency room. Because of this shift, there has been an expansion of urgent care sites into underserved markets, which can also support health systems’ strategies for patient acquisition and retaining specialist referrals. Outside of underserved markets, on-demand or urgent care sites are considered beneficial as they may act as referral points, converting single visits to longstanding relationships .
Telehealth
Telehealth has become an increasingly popular means by which patients seek medical care. COVID-19 only exacerbated pre-existing trends, with percentage of provider visits increasing from 0.3% in 2019 to 23.6% in 2020. Since its peak in April 2020, the utilization of telehealth has since stabilized. Additionally, based on consumer research done by McKinsey, consumers view telehealth as an important modality for their care needs, with views varying widely depending on the type of care, with primary care and other types of specialty visits continuing to be performed in a clinical setting.
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Additionally, based on consumer research done by McKinsey, consumers view telehealth as an important modality for their care needs, with views varying widely depending on the type of care. Primary care and other types of specialty visits are continuing to be performed in a clinical setting.
Because consumers were using telehealth services during the pandemic more than ever before, the number of investments in telehealth increased substantially. Health insurance companies, pharmacy chains, tech giants, and even genetic testing companies invested in various telehealth providers, each to gain a sliver of the telehealth pie. Trends in telehealth investment included telehealth for specific, targeted care needs, and telehealth used as one part of a broader toolkit, rather than the end goal of patient care.
Healthcare Employment
Employment in the healthcare industry has steadily increased for at least 20 years despite three recessions during that period. Healthcare-related jobs are among the fastest growing occupations, projected to increase by more than 16% between 2020 and 2030, double the general U.S. employment growth projection of 8%, according to the Bureau of Labor Statistics. We expect the increased growth in the healthcare industry will correspond with a growth in demand for MOBs and other facilities that serve the healthcare industry.
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Although employment in the healthcare sector is projected to grow, COVID-19 has had a significant impact on healthcare staffing, with exhaustion, burnout, stress and anxiety commonly reported among healthcare workers. Labor is the greatest expense category for healthcare organizations, and labor disruptions such as those exacerbated by the pandemic can be time consuming and costly to address. While employment in many healthcare settings has gradually increased back to pre-pandemic levels, not all jobs are returning at the same pace. Outpatient settings have seen employment gains that have more-than made up for pandemic job losses, however hospital, nursing home, and residential care employment remains below pre-pandemic levels, particularly in nursing and residential care facilities. As we continue into 2022, healthcare employment and hiring will continue to be impacted by the same shifts we are seeing across the workforce – workers are choosing positions that match their desired work environment, schedule, location, and intensity.
COVID-19 Impacts
The COVID-19 pandemic had a dramatic impact on the healthcare industry, upending long-held beliefs on consumer preferences and the regulatory environment. While it is unclear whether pandemic-era changes will remain permanent, the shifting care setting, demographic shifts, and medical staffing challenges are important matters to consider with respect to the healthcare industry as a whole.
COVID-19 had a significant influence on how, when and where patients seek care. As telehealth utilization rose among many, others elected to defer preventative or other non-COVID-19 related clinical care. As the demand for healthcare begins to equalize with an eventual, more permanent shift back to non-COVID-19 related care, we expect there to be a longer-term increase in utilization.
Medical Office Building Supply and Demand
MOBs are less susceptible to changes in the general economy than traditional commercial real estate due to secular drivers supporting the healthcare sector and the defensive nature of healthcare expenditures during economic downturns. For this reason, we believe MOB investments provide more consistent rental revenue streams, higher occupancies and tenant retention that could potentially translate into a more stable return to investors compared to other types of real estate investments. We also believe that demand for MOBs will increase due to a number of MOB specific factors, including:
• The MOB sector is highly fragmented with approximately 13% of the MOBs owned by public REIT investors. There is significant opportunity to expand within the industry given the lack of institutional ownership compared to other real estate sectors.
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• An increase in medical office visits due to the overall rise in healthcare utilization, which in turn has driven hiring within the healthcare sector. Additionally, the rate of employment growth in physicians’ offices and outpatient care facilities has outpaced employment growth in hospitals during the past decade, further supporting the trend of increased utilization of healthcare services outside of the hospital. This trend is forecast to continue, with the number of healthcare providers, particularly nurses, physicians, and technical specialists, growing significantly faster than the U.S. average for the other occupations.
• High credit quality of physician tenants. In recent years, MOB tenants have increasingly consisted of larger hospital and physician groups. These groups utilize their size and expertise to obtain high rates of reimbursement and share overhead operating expenses which creates significant rent coverage, or an ability to pay rent. We believe these larger groups are generally credit-worthy and provide stability and long-term value for MOBs.
• Consistent and reliable occupancy has insulated the medical office sector from volatility that can be disruptive to other industries. Even through the early months of COVID-19, when non-emergency outpatient services were temporarily suspended, occupancy remained strong. According to data from Revista, quarterly weighted average occupancy rates have averaged 91.6% from 2019 to 2021. Additionally, during 2020, owners of medical office space collected more than 95% of rent due, according to data collected by Revista.
• Construction of new MOBs relative to the overall MOB supply continues to be constrained, with new market participants experiencing significant costly barriers to entry in markets in which we invest.
• Creating strong demand for our MOBs. In addition, new development is primarily focused on off campus locations and in markets with growing populations.
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PORTFOLIO OF PROPERTIES
As of December 31, 2021, our portfolio consisted of approximately 26.1 million square feet of GLA, with a leased rate of 89.3% (includes leases which have been executed, but which have not yet commenced).
Our properties were primarily located on the campuses of, or aligned with, nationally and regionally recognized healthcare systems in the U.S. These properties include leading health systems, such as Highmark-Allegheny Health Network, Baylor Scott & White Health, Hospital Corporation of America, Tenet Healthcare Corporation, and Ascension. The Company is the largest owner of on-campus or adjacent MOBs in the country, with approximately 17.4 million square feet of GLA, or 67%, of our portfolio located in these locations. The remaining 33% are located in core community outpatient locations where we believe healthcare is increasingly being delivered.
Portfolio Diversification by Type Number of
Buildings Number of
States Annualized Base Rent (1)(2)
Percent of Annualized Base Rent GLA (1)
Percent of Total GLA
Medical Office Buildings
Single-tenant 125 18 142,161 24.3 % $ 5,765 22.1 %
Multi-tenant 327 32 403,707 69.1 18,982 72.8
Other Healthcare Facilities
Hospitals 15 7 32,696 5.6 954 3.7
Senior care 3 1 5,786 1.0 354 1.4
Total 470 32 584,350 100 % $ 26,055 100 %
(1) Amounts presented in thousands.
(2) Annualized base rent is calculated by multiplying contractual base rent as of the end of the year by 12 (excluding the impact of abatements, concessions, and straight-line rent).
SIGNIFICANT TENANTS
As of December 31, 2021, none of the tenants at our properties accounted for more than 4.1% of our annualized base rent. The table below shows our key health system tenant relationships as of December 31, 2021.
Health System (1)
Weighted Average Remaining Lease Term (2)
Annualized Base Rent (3)(4)
Percent of Annualized Base Rent Total Leased GLA (3)
Percent of Leased GLA
Baylor Scott & White Health 5 23,797 4.1 % $ 827 3.6 %
HCA Healthcare 6 22,052 3.8 741 3.2
Highmark-Allegheny Health Network 8 17,681 3.0 927 4.0
Tenet Healthcare Corporation 6 15,046 2.6 600 2.6
Ascension 5 11,823 2.0 485 2.1
Tufts Medical Center 6 11,598 2.0 255 1.1
Steward Health Care 8 10,644 1.8 380 1.6
AdventHealth 4 9,994 1.7 402 1.7
Community Health Systems 7 7,944 1.4 385 1.7
CommonSpirit Health 8 7,884 1.3 356 1.5
Emblem Health 13 7,649 1.3 281 1.2
Trinity Health 6 7,227 1.2 288 1.2
Harbin Clinic 6 7,225 1.2 316 1.4
United Health Group 4 6,426 1.1 279 1.2
Mercy Health 6 6,226 1.1 190 0.8
173,216 29.6 % $ 6,712 28.9 %
(1) The amounts in this table illustrate only direct leases with selected leading health systems in our portfolio and are not inclusive of all health system tenants.
(2) Amounts presented in years.
(3) Amounts presented in thousands.
(4) Annualized base rent is calculated by multiplying contractual base rent as of the end of the year by 12 (excluding the impact of abatements, concessions, and straight-line rent).
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GEOGRAPHIC CONCENTRATION
As of December 31, 2021, our portfolio was concentrated in key markets that we believe are strategic based on demographic trends, projected demand for healthcare and overall asset management efficiencies.
Key Markets Annualized Base Rent (1)(2)
Percent of Annualized Base Rent Total GLA (1)
Percent of Portfolio Investment (1)
Percent of Investment
Dallas, TX $ 57,240 9.8 % 2,209 8.5 % $ 914,237 11.7 %
Houston, TX 37,200 6.4 1,934 7.4 534,869 6.8
Boston, MA 36,346 6.2 965 3.7 397,693 5.1
Miami, FL 31,417 5.4 1,327 5.1 358,449 4.6
Atlanta, GA 27,290 4.7 1,208 4.6 361,600 4.6
Indianapolis, IN 26,901 4.6 1,396 5.4 281,768 3.6
Phoenix, AZ 25,218 4.3 1,313 5.0 267,781 3.4
Hartford/New Haven, CT 25,215 4.3 1,187 4.5 347,104 4.4
Tampa, FL 24,548 4.2 954 3.7 347,764 4.4
Raleigh, NC 20,743 3.5 885 3.4 250,858 3.2
Pittsburgh, PA 20,063 3.4 1,094 4.2 148,612 1.9
Charlotte, NC 18,220 3.1 927 3.6 216,037 2.8
Orange County/Los Angeles, CA 17,285 3.0 718 2.7 326,070 4.2
New York, NY 16,019 2.7 615 2.4 256,144 3.3
Albany, NY 14,955 2.6 833 3.2 170,071 2.2
Chicago, IL 13,706 2.4 454 1.7 231,178 3.0
Denver, CO 13,471 2.3 608 2.3 265,807 3.4
Orlando, FL 12,667 2.2 513 2.0 156,300 2.0
Austin, TX 9,182 1.6 409 1.6 164,425 2.1
El Paso, TX 9,039 1.5 476 1.8 121,409 1.5
Top 20 MSAs 456,725 78.2 20,025 76.8 6,118,176 78.2
Additional Top MSAs 97,149 16.6 4,604 17.7 1,310,407 16.8
Total Key Markets in Top 75 MSAs $ 553,874 94.8 % 24,629 94.5 % $ 7,428,583 95.0 %
(1) Amounts presented in thousands.
(2) Annualized base rent is calculated by multiplying contractual base rent as of the end of the year by 12 (excluding the impact of abatements, concessions, and straight-line rent).
COMPETITION
We compete with many other real estate investment entities, including financial institutions, pension funds, real estate developers, other REITs, other public real estate companies, and private real estate investors for the acquisition of MOBs and other facilities that serve the healthcare industry. During the acquisition process, we compete with others who may have a competitive advantage over us at this time in terms of size, capitalization, local knowledge of the marketplace and extended contacts throughout the region. Any combination of these factors may result in an increased purchase price for properties or other real estate related assets of interest to us, which may reduce the number of opportunities available to us that meet our investment criteria. If the number of opportunities that meet our investment criteria are limited, our ability to increase stockholder value may be adversely impacted.
We face competition in leasing available MOBs and other facilities that serve the healthcare industry to prospective tenants. As a result, we may have to provide rent concessions, incur charges for tenant improvements, offer other inducements, or we may be unable to timely lease vacant space in our properties, all of which may have an adverse impact on our results of operations. At the time we elect to dispose of our properties, we will also be in competition with sellers of similar properties to locate suitable purchase opportunities.
We believe our focus on MOBs, our experience and expertise, and our ongoing relationships with healthcare providers provide us with a competitive advantage. We have established an asset identification and acquisition network with healthcare providers and local developers which provides for the early identification of and access to acquisition opportunities. In addition, we believe this broad network allows us to effectively lease available space, retain our tenants, and maintain and improve our assets.
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GOVERNMENT REGULATIONS
Healthcare-Related Regulations
Overview. The healthcare industry is heavily regulated by federal, state and local governmental agencies. Our tenants generally are subject to laws and regulations covering, among other things, licensure, certification for participation in government programs, fraud and abuse, relationships with physicians and other referral sources, and reimbursement. Changes in these laws and regulations could negatively affect the ability of our tenants to satisfy their contractual obligations, including making lease payments to us.
Healthcare Reform. The current wave of healthcare reform launched with the ACA in 2010. The ACA expanded health insurance coverage through tax subsidies and federal health insurance programs, individual and employer mandates for health insurance coverage, and the creation of health insurance exchanges (federal and state marketplaces).
The Biden administration has indicated that it will maintain and build upon the ACA and has suggested proposals that would include the adoption of a national public health insurance option (“Medicare for all”), increasing the value of current tax credits related to insurance premiums, and expanding coverage to low-income individuals.
Reimbursement Programs. Sources of revenue for our tenants may include the federal Medicare program, TRICARE, state Medicaid programs, private insurance carriers, health maintenance organizations, preferred provider arrangements and self-insured employers, among others. Medicare, TRICARE and Medicaid programs, as well as numerous private insurance and managed care plans, generally require participating providers to accept government-determined reimbursement levels as payment in full for services rendered, without regard to facility charges. Changes in the reimbursement rate or methods of payment from third-party payors, including Medicare and Medicaid, could result in a substantial reduction in our tenants’ revenues.
In previous years, Medicare’s physician fee-for-service reimbursements were subject to a significant, automatic reduction in rates. Congress repeatedly enacted temporary legislation postponing the implementation of these physician rate cuts. In April 2015, the Medicare Access and CHIP Reauthorization Act of 2015, enacted rules that establishes physician reimbursement rates that allow for steady increases in rates over the near future.
Despite this “doc-fix” legislation, we cannot predict whether future Congressional proposals will seek to reduce physician reimbursements. Efforts by other such payors to reduce healthcare costs will likely continue, which may result in reductions or slower growth in reimbursement for certain services provided by some of our tenants. Further, revenue realizable under third-party payor agreements can change after examination and retroactive adjustment by payors during the claims settlement processes or as a result of post-payment audits. Payors may disallow requests for reimbursement based on determinations that certain costs are not reimbursable or reasonable, because additional documentation is necessary or because certain services were not covered or were not medically necessary.
Amendments to the ACA and regulatory changes could impose further limitations on government and private payments to healthcare providers. The ACA expanded Medicaid coverage to all individuals under age 65 with incomes up to 133% of the federal poverty level. While the federal government agreed to pay the Medicaid expansion costs for newly eligible beneficiaries from 2014 through 2016, the federal government’s portion began declining in 2017. Further, the U.S. Supreme Court held in 2012 that states could not be required to expand their Medicaid programs, which has resulted in some states deciding not to expand their Medicaid programs. In some other cases, states have enacted or are considering enacting measures designed to reduce their Medicaid expenditures and to make changes to private healthcare insurance. Efforts to reduce costs will likely continue, which may result in reduced or slower growth in reimbursement for certain services provided by our tenants. In addition, the failure of any of our tenants to comply with various laws and regulations could jeopardize their ability to continue participating in Medicare, TRICARE, Medicaid and other government sponsored payment programs. The financial impact on our tenants’ failure to comply with such laws and regulations could restrict their ability to make rent payments to us.
Various laws and Center for Medicare and Medicaid Services (“CMS”) initiatives and rules may also reduce or change medical provider compensation and reimbursement.
These new laws, initiatives and CMS rules reflect an ongoing effort to reduce healthcare costs and reimburse medical providers based on criteria other than fee-for-service. Although their impact is difficult to predict, these laws, initiatives and CMS rules may adversely impact medical providers’ reimbursement and our tenants’ ability to make rent payments to us.
Fraud and Abuse Laws. There are various federal and state laws prohibiting fraudulent and abusive business practices by healthcare providers who participate in, receive payments from, or are in a position to make referrals in connection with, government-sponsored healthcare programs, including the Medicare and Medicaid programs. Additionally, the ACA includes program integrity provisions that both create new authorities and expand existing authorities for federal and state governments
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to address fraud, waste and abuse in federal healthcare programs. Our lease arrangements with certain tenants may also be subject to these fraud and abuse laws. These laws include, among others:
• the Federal Anti-Kickback Statute, which prohibits, among other things, the offer, payment, solicitation or receipt of any form of remuneration in return for, or to induce, the referral or recommendation for the ordering of any item or service reimbursed by a federal healthcare program, including Medicare or Medicaid;
• the Federal Physician Self-Referral Prohibition, commonly referred to as the “Stark Law,” which: (1) requires hospital landlords of facilities with financial relationships to charge a fair market value rent that does not take into account the volume or value of referrals and subject to specific exceptions; and (2) restricts physicians from making referrals for specifically designated health services for which payment may be made under Medicare and Medicaid programs to an entity with which the physician, or an immediate family member, has a financial relationship;
• the False Claims Act, which prohibits any person from knowingly presenting or causing to be presented false or fraudulent claims for payment to the federal government, including claims paid by the Medicare and Medicaid programs;
• the Civil Monetary Penalties Law, which authorizes the U.S. Department of Health and Human Services to impose monetary penalties for certain fraudulent acts and regulatory violations and to exclude violators from participating in federal healthcare programs;
• the Health Insurance Portability and Accountability Act, as amended by the Health Information Technology for Economic and Clinical Health Act of the American Recovery and Reinvestment Act of 2009, which protects the privacy and security of personal health information; and
• State laws which prohibit kickbacks, self-referrals and false claims, and are generally applicable to commercial and state payors.
In the ordinary course of their business, our tenants may be subject to inquiries, investigations and audits by federal and state agencies that oversee applicable laws and regulations. Private enforcement of healthcare fraud has also increased, due in large part to amendments to the civil False Claims Act that were designed to encourage private individuals to sue on behalf of the government. These whistleblower suits, known as qui tam suits, may be filed by almost anyone, including present and former employees or patients. In addition to the False Claims Act, there may be civil litigation between private parties which seek damages for violations of federal and state laws. These types of actions may result in monetary penalties, punitive sanctions, damage assessments, imprisonment, increased governmental oversight, denial of Medicare and Medicaid payments and/or exclusion from the Medicare and Medicaid programs. Investigation by a federal or state governmental body for violation of fraud and abuse laws, imposition of any of these penalties upon one of our tenants, and civil litigation could jeopardize that tenant’s ability to operate or to make rent payments to us.
Healthcare Licensure and Certification. Some of our medical properties and our tenants may require a license, multiple licenses, a certificate of need (“CON”), or other certification to operate. Failure to obtain a license, CON, other certification, or loss of a required license, CON, or some other certification would prevent a facility from operating in the manner intended by the tenant. This event could adversely affect our tenants’ ability to make rent payments to us. State and local laws also may regulate physical plant expansion, including the addition of new beds or services or acquisition of medical equipment and the construction of healthcare-related facilities, by requiring a CON or other similar approval. State CON laws are not uniform throughout the U.S. and are subject to change. We cannot predict the impact of state CON laws on our facilities or the operations of our tenants.
Real Estate Ownership-Related Regulations
Many laws and governmental regulations are applicable to our properties and changes in these laws and regulations, or their interpretation by agencies and the courts, occur frequently. For example:
Costs of Compliance with the Americans with Disabilities Act. Under the Americans with Disabilities Act of 1990, as amended (the “ADA”), all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. Although we believe that we are in substantial compliance with present requirements of the ADA, none of our properties have been audited and we have only conducted investigations of a limited number of our properties to determine compliance. We may incur additional costs in connection with compliance with the ADA. Additional federal, state and local laws also may require modifications to our properties or restrict our ability to renovate our properties. We cannot predict the cost of compliance with the ADA or other legislation. We may incur substantial costs to comply with the ADA or any other legislation.
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Costs of Government Environmental Regulation and Private Litigation. Environmental laws and regulations hold us liable for the costs of removal or remediation of certain hazardous or toxic substances which may be on our properties. These laws could impose liability on us without regard to whether we caused the presence or release of the hazardous materials. Government investigations and remediation actions may cause substantial costs and the presence of hazardous substances on a property could result in personal injury or similar claims by private plaintiffs. Various laws also impose liability on persons who arrange for the disposal or treatment of hazardous or toxic substances and such persons oftentimes must incur the cost of removal or remediation of hazardous substances at the disposal or treatment facility. These laws often impose liability whether or not the person arranging for the disposal ever owned or operated the disposal facility. As the owner and operator of our properties, we may be deemed to have arranged for the disposal or treatment of hazardous or toxic substances.
Use of Hazardous Substances by Some of Our Tenants. Some of our tenants handle hazardous substances and wastes on our properties as part of their routine operations. Environmental laws and regulations subject these tenants, and potentially us, to liability resulting from such activities. Our leases require our tenants to comply with these environmental laws and regulations and to indemnify us for any related liabilities. We are unaware of any material noncompliance, liability or claim relating to hazardous or toxic substances or petroleum products in connection with any of our properties.
Other Federal, State and Local Regulations. Our properties are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. If we fail to comply with these various requirements, we may incur governmental fines or private damage awards. While we believe that our properties are currently in material compliance with all of these regulatory requirements, we do not know whether existing requirements will change or whether future requirements will require us to make significant unanticipated expenditures. We believe, based in part on engineering reports which are generally obtained by us at the time we acquire the properties, that all of our properties comply in all material respects with current regulations. However, if we were required to make significant expenditures under applicable regulations, our financial condition, results of operations, cash flow, ability to satisfy our debt service obligations and to pay distributions to our stockholders could be adversely affected.
HUMAN CAPITAL
As of December 31, 2021, we had 357 employees, of which less than 1% are subject to a collective bargaining agreement.
Our commitment to our employees continues to be a high priority for us. In addition to base salary, our annual compensation and benefit plans includes short-term incentive bonuses, long-term incentive stock plans, a 401(k) plan, healthcare and insurance benefits, health savings accounts, paid time off, tuition assistance, employee assistance programs, among other benefits. We are committed to the health, safety and well-being of all of our employees. In response to the COVID-19 pandemic, we have taken additional precautionary measures to adjust our business operations and to address the needs of our employees. In addition to our ongoing sponsorship of various health and wellness initiatives to aid in the overall well-being of our employees, we have provided hazard pay, deployed comprehensive personal protective equipment, and have implemented many new protocols both in our tenant buildings and regional office locations based on the Center for Disease Control and other government mandated or recommended guidelines.
We support employee development through numerous company-sponsored training programs and professional development opportunities. Our employees regularly participate in various industry-specific training programs and conferences, and are encouraged to seek out relevant certifications or accreditations that provide additional expertise in real estate and other relevant sector-specific subjects. In addition, we provide internal cross-functional training opportunities in order that our employees may familiarize themselves with multiple aspects of our business.
TAX MATTERS
We filed an election with our 2007 federal income tax return to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). We believe we have satisfied the requirements to qualify as a REIT for all tax years starting in 2007 and we intend to maintain our qualification as a REIT in the future. As a qualified REIT, with limited exceptions, we are generally not subject to federal and certain state income tax on net income that we currently distribute to stockholders. We expect to continue to make distributions sufficient to avoid income tax.
While we believe that we are organized and qualified as a REIT and we intend to operate in a manner that will allow us to continue to qualify as a REIT, there can be no assurance that we will be successful in this regard. Our qualification as a REIT depends upon our ability to meet, through our annual operating results, asset diversification, distribution levels and diversity of stock ownership and the various qualification tests imposed under the Code. If we fail to maintain our qualification as a REIT, corporate level income tax would apply to our taxable income at the current corporate tax rates. As a result, the amount available for distributions to stockholders would be reduced and we would no longer be required to make distributions. Failure to qualify as a REIT could also adversely affect our ability to make investments and raise capital.
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Qualification as a REIT involves the application of highly technical and complex provisions of the Code for which there are limited judicial and administrative interpretations and involves the determination of a variety of factual matters and circumstances not entirely within our control.
EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding our executive officers included in Part III, Item 10 of this Annual Report is incorporated herein by reference.