Healthcare Realty Trust Inc 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Disclosure Regarding Forward-Looking Statements This report and other materials the Company has filed or may file with the Securities and Exchange Commission (the "SEC"), as well as information included in oral statements or other written statements made, or to be made, by management of the Company, contain, or will contain, disclosures that are “forward-looking statements.” Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “target,” “intend,” “plan,” “estimate,” “project,” “continue,” “should,” “could," "budget" and other comparable terms, and include, but are not limited to, statements related to the anticipated timing, financing benefits and financial and operational impact of the Merger. These forward-looking statements are based on the Company's, and with respect to the Merger, include HTA's, current plans, objectives, estimates, expectations and intentions and inherently involve significant risks and uncertainties. Actual results and the timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risks and uncertainties, which include, without limitation, risks and uncertainties associated with: risks related to diverting the attention the Company's management from ongoing business operations; failure to realize the expected benefits of the Merger; significant transaction costs and/or unknown or inestimable liabilities of the Merger; the risk of shareholder litigation in connection with the Merger, including resulting expense or delay; the risk that the Company’s and HTA’s respective businesses will not be integrated successfully or that such integration may be more difficult, time-consuming or costly than expected; risks related to future opportunities and plans for the Combined Company, including the uncertainty of expected future financial performance and results of the Combined Company following completion of the transaction; the possibility that, if the Combined Company does not achieve the perceived benefits of the Merger as rapidly or to the extent anticipated by financial analysts or investors, the market price of the Combined Company’s common stock could decline; general adverse economic and local real estate conditions; the inability of significant tenants to continue paying their rent obligations due to bankruptcy, insolvency or a general downturn in their business; increases in interest rates; increases in operating expenses and real estate taxes; changes in the dividend policy for the Combined Company’s common stock or its ability to pay dividends; impairment charges; pandemics or other health crises, such as COVID-19; and other risks and uncertainties affecting the Combined Company, including those described from time to time under the caption “Risk Factors” and elsewhere in the Combined Company’s filings and reports with the SEC, including the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Moreover, other risks and uncertainties of which the Combined Company is not currently aware may also affect the Combined Company's forward-looking statements and may cause actual results and the timing of events to differ materially from those anticipated. The forward-looking statements made in this communication are made only as of the date hereof or as of the dates indicated in the forward-looking statements, even if they are subsequently made available by the Combined Company on its website or otherwise. The Combined Company undertakes no obligation to update or supplement any forward-looking statements to reflect actual results, new information, future events, changes in its expectations or other circumstances that exist after the date as of which the forward-looking statements were made, except as required by law. Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in the Combined Company’s filings and reports, including, without limitation, estimates and projections regarding the performance of development projects the Combined Company is pursuing. For a detailed discussion of the Combined Company’s risk factors, please refer to Legacy HR's and Legacy HTA's filings with the SEC, including this report and Item 1A. Risk Factors herein and Legacy HR's and Legacy HTA's Annual Report on Form 10-K for the year ended December 31, 2021. Merger with Healthcare Trust of America Completed Merger On July 20, 2022, Legacy HR, Legacy HTA, the OP and Merger Sub completed the Merger in accordance with the terms of the Merger Agreement. Immediately following the Merger, Legacy HR converted to a Maryland limited liability company and changed its name to “HRTI, LLC” and Legacy HTA changed its name to “Healthcare Realty Trust Incorporated”. In addition, the equity interests of Legacy HR were contributed by Legacy HTA by means of a contribution and assignment agreement to the OP such that Legacy HR became a wholly-owned subsidiary of the OP. As a result, Legacy HR became a part of an umbrella partnership REIT (“UPREIT”) structure, which is intended to align the corporate structure of the combined company after giving effect to the Merger and the UPREIT reorganization (the “Combined Company”) and to provide a platform for the Combined Company to more efficiently acquire properties in a tax-deferred manner. The Combined Company operates under the name “Healthcare Realty Trust Incorporated” and its shares of class A common stock, $0.01 par value per share, trade on the New York Stock Exchange (the “NYSE”) under the ticker symbol “HR”. 21 Table of Contents Unless expressly stated otherwise, the discussion in this Item 2 refers to Legacy HR's financial condition and results of operations on a stand-alone basis prior to giving effect to the Merger. Because Legacy HR was the accounting acquirer under GAAP in the transaction, its historical financial statements become the historical financial statements for the Company. For additional information, please refer to the Explanatory Note in this Quarterly Report on Form 10-Q. Liquidity and Capital Resources Sources and Uses of Cash The Company’s primary sources of cash include rent receipts from its real estate portfolio based on contractual arrangements with its tenants, proceeds from the sales of real estate properties, joint ventures, and proceeds from public or private debt or equity offerings. Prior to the refinancing of its bank facilities in connection with the Merger, as of June 30, 2022, the Company had $209.5 million available to be drawn on its unsecured credit facility under the Amended and Restated Credit Agreement, dated as of May 31, 2019 (the "Unsecured Credit Facility") and $34.3 million in cash. The Combined Company expects to continue to meet its liquidity needs, including funding additional investments, paying dividends, and funding debt service, through cash flows from operations and liquidity sources described in Note 9 to the Condensed Consolidated Financial Statements included in this report. The Combined Company believes that its liquidity and sources of capital are adequate to satisfy its cash requirements. The Combined Company cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to the Combined Company in sufficient amounts to meet its liquidity needs. Financings in Connection with the Merger Credit Facilities In connection with the effectiveness of the Merger, Legacy HR (in a limited capacity), Legacy HTA and the OP entered into the Fourth Amended and Restated Credit and Term Loan Agreement (the “Credit Facility”) with Wells Fargo Bank, National Association, as Administrative Agent; Wells Fargo Securities, LLC, JPMorgan Chase Bank, N.A., and Citibank, N.A., as Joint Book Runners; Wells Fargo Securities, LLC, JPMorgan Chase Bank, N.A., U.S. Bank National Association, Citibank, N.A., The Bank of Nova Scotia, Capital One, National Association, U.S. Bank National Association, and PNC Capital Markets LLC, as Joint Lead Arrangers; and the other lenders named therein. The Credit Facility restructures the parties’ existing bank facilities and adds additional borrowing capacities for the Combined Company following the Merger. See Note 9 to the Condensed Consolidated Financial Statements for additional information. Investing Activities Cash flows used in investing activities for the six months ended June 30, 2022 were approximately $281.2 million. Below is a summary of significant investing activities. 22 Table of Contents Company Acquisitions The following table details the Company's acquisitions for the six months ended June 30, 2022: Dollars in thousands ASSOCIATED HEALTH SYSTEM/TENANCY 1 DATE ACQUIRED PURCHASE PRICE SQUARE FOOTAGE MILES TO CAMPUS Dallas, TX Texas Health Resources 2/11/22 $ 8,175 18,000 0.19 San Francisco, CA 2 Kaiser/Sutter Health 3/7/22 114,000 166,396 0.90 to 3.30 Atlanta, GA Wellstar Health 4/7/22 6,912 21,535 0.00 Denver, CO Centura Health 4/13/22 6,320 12,207 2.40 Colorado Springs, CO 3 Centura Health 4/13/22 13,680 25,800 0.80 to 1.70 Seattle, WA UW Medicine 4/28/22 8,350 13,256 0.05 Houston, TX CommonSpirit 4/28/22 36,250 76,781 1.70 Los Angeles, CA Cedars-Sinai Health Systems 4/29/22 35,000 34,282 0.11 Oklahoma City, OK Mercy Health 4/29/22 11,100 34,944 0.18 Raleigh, NC 2 WakeMed/None 5/31/22 27,500 85,113 0.25 to 12.30 Tampa, FL 3 BayCare Health 6/9/22 18,650 55,788 0.23 Total real estate acquisitions $ 285,937 544,102 1 Includes buildings located on-campus, adjacent and off-campus that are anchored by healthcare systems or located within two miles of a hospital campus. 2 Includes three properties. 3 Includes two properties. Subsequent to June 30, 2022 and unrelated to the Merger, the Company acquired the following property: Dollars in thousands ASSOCIATED HEALTH SYSTEM/TENANCY 1 DATE ACQUIRED PURCHASE PRICE SQUARE FOOTAGE MILES TO CAMPUS Seattle, WA EvergreenHealth 8/1/22 $ 4,850 10,593 0.24 TIAA Joint Venture Acquisitions The following table details the TIAA Joint Venture's acquisitions for the six months ended June 30, 2022: Dollars in thousands ASSOCIATED HEALTH SYSTEM/TENANCY 1 DATE ACQUIRED PURCHASE PRICE SQUARE FOOTAGE MILES TO CAMPUS COMPANY OWNERSHIP % San Francisco, CA 2 MarinHealth/Kaiser 3/7/22 $ 67,175 110,865 0.00 to 3.30 50 % Los Angeles, CA 3 Valley Presbyterian Health 3/7/22 33,800 103,259 1.30 50 % Total TIAA Joint Venture acquisitions $ 100,975 214,124 1 Includes buildings located on-campus, adjacent and off-campus that are anchored by healthcare systems or located within two miles of a hospital campus. 2 Includes three properties. 3 Includes two properties. Dispositions The Company disposed of four properties during the six months ended June 30, 2022 for a total sales price of $110.5 million, including cash proceeds of $108.1 million. The following table details these dispositions for the six months ended June 30, 2022: Dollars in thousands Date Disposed Sales Price Square Footage Loveland, CO 1 2/24/22 $ 84,950 150,291 San Antonio, TX 1 4/15/22 25,500 201,523 Total dispositions $ 110,450 351,814 1 Includes two properties. 23 Table of Contents Capital Funding During the six months ended June 30, 2022, capital funding included the following: • $17.2 million toward the following development and redevelopment of properties: ◦ Memphis, Tennessee redevelopment totaled $2.1 million; ◦ Dallas, Texas redevelopments totaled $3.3 million; ◦ Tacoma, Washington redevelopment totaled $5.4 million; ◦ Nashville, Tennessee development totaled $5.6 million; ◦ reposition properties capital and tenant improvements totaled $0.1 million; and ◦ tenant improvement funding for previously completed projects totaled $0.7 million. • $14.6 million toward first generation tenant improvements and planned capital expenditures for acquisitions; • $9.9 million toward second generation tenant improvements; and • $7.2 million toward capital expenditures. Financing Activities Cash flows provided by financing activities for the six months ended June 30, 2022 were approximately $188.2 million. Inflows from equity proceeds related to the Company's common stock issuances totaled $22.8 million, net of issuance costs incurred, and net borrowing totaled $262.3 million. Aggregate cash outflows totaled approximately $96.9 million primarily associated with dividends paid to common stockholders. See Notes 4 and 7 to the Condensed Consolidated Financial Statements accompanying this report for more information about capital markets and financing activities. Common Stock Issuances At-The-Market Equity Offering Program On August 6, 2021 and November 5, 2021, the Company entered into equity distribution agreements with 12 investment banks to allow for issuance and sale under its at-the-market equity offering program of up to an aggregate of $750.0 million of common stock. These agreements are no longer in effect following the closing of the Merger on July 20, 2022. The following table details the Company's forward at-the-market activity: WEIGHTED AVERAGE SALE PRICE per share FORWARD SHARE CONTRACTS SHARES SETTLED SHARES REMAINING TO BE SETTLED NET PROCEEDS in millions Balance at December 31, 2021 $ — — — 727,400 $ — 1Q 2022 $ 31.73 — 727,400 — $ 22.3 2Q 2022 $ — — — — $ — Debt Activity On February 18, 2022, the Company repaid in full a mortgage note payable bearing interest at a rate of 4.70% that encumbered a 56,762 square foot property in California. The aggregate payoff price of $12.6 million consisted of outstanding principal of $11.0 million and a "make-whole" amount of approximately $1.6 million. The unamortized premium of $0.8 million and the unamortized cost on this note of $0.1 million were written off upon payoff. On February 24, 2022, the Company repaid in full a mortgage note payable bearing interest at a rate of 6.17% that encumbered a 80,153 square foot property in Colorado, in conjunction with the disposition of the property. The aggregate payoff price of $6.4 million consisted of outstanding principal of $5.8 million and a "make-whole" amount of approximately $0.6 million. The unamortized premium of $0.1 million was written off upon payoff. 24 Table of Contents As of June 30, 2022, the Company has outstanding interest rate derivatives from Legacy HR totaling $175.0 million to hedge one-month LIBOR. The following details the amount and rate of each swap (dollars in thousands): EFFECTIVE DATE AMOUNT WEIGHTED AVERAGE RATE EXPIRATION DATE December 18, 2017 $ 25,000 2.18 % December 16, 2022 February 1, 2018 50,000 2.46 % December 16, 2022 May 1, 2019 50,000 2.33 % May 1, 2026 June 3, 2019 50,000 2.13 % May 1, 2026 $ 175,000 2.29 % Operating Activities Cash flows provided by operating activities increased from $105.6 million for the six months ended June 30, 2021 to $114.1 million for the six months ended June 30, 2022. Items impacting cash flows from operations include, but are not limited to, cash generated from property operations, interest payments and the timing related to the payment of invoices and other expenses. The Company may, from time to time, sell properties and redeploy cash from property sales into new investments. To the extent revenues related to the properties being sold exceed income from these new investments, the Company's results of operations and cash flows could be adversely affected. New Accounting Pronouncements See Note 1 to the Condensed Consolidated Financial Statements accompanying this report for information on new accounting standards. Trends and Matters Impacting Operating Results Management monitors factors and trends important to the Company and the REIT industry to gauge the potential impact on the operations of the Company. In addition to the matters discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, below are some of the factors and trends that management believes may impact future operations of the Company. Expiring Leases The Company expects that approximately 15% to 20% of the leases will expire each year in the ordinary course of business. There are 540 leases totaling 1.9 million square feet that will expire during the remainder of 2022. Approximately 87% of the leases expiring in 2022 are in buildings located on or adjacent to hospital campuses, are distributed throughout the portfolio, and are not concentrated with any one tenant, health system or market area. The Company typically expects to retain 75% to 90% of tenants upon expiration, and the retention ratio for the first six months of the year was within this range. Operating Expenses The Company historically has experienced increases in property taxes throughout its portfolio as a result of increasing assessments and tax rates levied across the country. The Company continues its efforts to appeal property tax increases and manage the impact of the increases. In addition, the Company historically has incurred variability in portfolio utilities expense based on seasonality, with the first and third quarters usually reflecting greater amounts. The effects of these operating expense increases are mitigated in leases that have provisions for operating expense reimbursement. As of June 30, 2022, leases for 90% of the Company's multi-tenant leased square footage allow for some recovery of operating expenses, with 30% having modified gross lease structures and 60% having net lease structures. General and Administrative Expense Prior to 2022, the Company granted long-term incentive awards, comprised of restricted stock, based on backward-looking performance measured at the end of the calendar year. The Company adopted a new incentive compensation structure, effective January 2022, comprised of RSUs. RSUs are granted at the beginning of the year with three-year forward-looking performance targets. With this change in the timing and structure of incentive awards, the expense associated with the 2021 backward-looking awards will overlap the expense associated with the January 2022 forward-looking awards. The new plan is expected to increase total general and administrative expense by $3.5 million in 2022. 25 Table of Contents Purchase Options Information about the Company's unexercised purchase options and the amount and basis for determination of the purchase price is detailed in the table below (dollars in thousands): NUMBER OF PROPERTIES GROSS REAL ESTATE INVESTMENT AS OF JUNE 30, 2022 YEAR EXERCISABLE MOB INPATIENT FAIR MARKET VALUE METHOD 1 NON FAIR MARKET VALUE METHOD 2 TOTAL Current 3 2 1 $ 55,146 $ — $ 55,146 2023 — — — — — 2024 — — — — — 2025 4 — 48,298 19,459 67,757 2026 1 — 21,109 — 21,109 2027 — — — — — 2028 1 — 41,101 — 41,101 2029 2 — 51,437 — 51,437 2030 — — — — — 2031 3 — 84,570 — 84,570 2032 and thereafter 4 7 — 255,071 — 255,071 Total 20 1 $ 556,732 $ 19,459 $ 576,191 1 The purchase option price includes a fair market value component that is determined by an appraisal process. 2 Includes properties with stated purchase prices or prices based on fixed capitalization rates. 3 These purchase options have been exercisable for an average of 14.9 years. 4 Includes the medical office building that is recorded in the line item Investment in financing receivable, net on the Company's Condensed Consolidated Balance Sheet. Non-GAAP Financial Measures and Key Performance Indicators Management considers certain non-GAAP financial measures and key performance indicators to be useful supplemental measures of the Company's operating performance. A non-GAAP financial measure is generally defined as one that purports to measure financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable measure determined in accordance with GAAP. Set forth below are descriptions of the non-GAAP financial measures management considers relevant to the Company's business and useful to investors, as well as reconciliations of these measures to the most directly comparable GAAP financial measures. The non-GAAP financial measures and key performance indicators presented herein are not necessarily identical to those presented by other real estate companies due to the fact that not all real estate companies use the same definitions. These measures should not be considered as alternatives to net income, as indicators of the Company's financial performance, or as alternatives to cash flow from operating activities as measures of the Company's liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of the Company's needs. Management believes that in order to facilitate a clear understanding of the Company's historical consolidated operating results, these measures should be examined in conjunction with net income and cash flows from operations as presented in the Condensed Consolidated Financial Statements and other financial data included elsewhere in this Quarterly Report on Form 10-Q. Funds from Operations ("FFO"), Normalized FFO and Funds Available for Distribution ("FAD") FFO and FFO per share are operating performance measures adopted by the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as the most commonly accepted and reported measure of a REIT’s operating performance equal to “net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization, impairment, and after adjustments for unconsolidated partnerships and joint ventures.” In addition to FFO, the Company presents Normalized FFO and FAD. Normalized FFO is presented by adding to FFO acquisition-related costs, acceleration of debt issuance costs, debt extinguishment costs and other Company-defined normalizing items to evaluate operating performance. FAD is presented by adding to Normalized FFO non- 26 Table of Contents real estate depreciation and amortization, non-cash financing receivable amortization, loan origination cost amortization, deferred financing fees amortization, stock-based compensation expense and provision for bad debts, net; and subtracting maintenance capital expenditures, including second generation tenant improvements and leasing commissions paid and straight-line rent income, net of expense. The Company's definition of these terms may not be comparable to that of other real estate companies as they may have different methodologies for computing these amounts. FFO, Normalized FFO and FAD should not be considered as an alternative to net income as an indicator of the Company's financial performance or to cash flow from operating activities as an indicator of the Company's liquidity. FFO, Normalized FFO and FAD should be reviewed in connection with GAAP financial measures. Management believes FFO, Normalized FFO, FFO per common share, Normalized FFO per share and FAD ("Non-GAAP Measures") provide an understanding of the operating performance of the Company’s properties without giving effect to certain significant non-cash items, primarily depreciation and amortization expense. Historical cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time. However, real estate values instead have historically risen or fallen with market conditions. The Company believes that by excluding the effect of depreciation, amortization, impairments and gains or losses from sales of real estate, all of which are based on historical costs and which may be of limited relevance in evaluating current performance, Non-GAAP Measures can facilitate comparisons of operating performance between periods. The Company reports Non-GAAP Measures because these measures are observed by management to also be the predominant measures used by the REIT industry and by industry analysts to evaluate REITs. For these reasons, management deems it appropriate to disclose and discuss these Non-GAAP Measures. However, none of these measures represent cash generated from operating activities determined in accordance with GAAP and are not necessarily indicative of cash available to fund cash needs. Further, these measures should not be considered as an alternative to net income as an indicator of the Company’s operating performance or as an alternative to cash flow from operating activities as a measure of liquidity. The table below reconciles net income to FFO, Normalized FFO and FAD for the three and six months ended June 30, 2022 and 2021. 27 Table of Contents THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, Amounts in thousands, except per share data 2022 2021 2022 2021 Net income $ 6,130 $ 23,096 $ 48,357 $ 47,118 Gain on sales of real estate properties (8,496) (20,970) (53,280) (39,860) Impairment of real estate properties — 5,078 (25) 5,912 Real estate depreciation and amortization 57,334 51,199 112,991 102,510 Proportionate share of unconsolidated joint ventures 2,807 1,354 5,176 2,168 FFO attributable to common stockholders $ 57,775 $ 59,757 $ 113,219 $ 117,848 Acquisition and pursuit costs 1 1,352 670 2,655 1,414 Merger-related costs 2 7,085 — 13,201 — Lease intangible amortization 584 (6) 893 (78) Non-routine legal costs/forfeited earnest money received 3 140 — 231 (500) Debt financing costs — 283 1,429 283 Unconsolidated JV normalizing items 4 83 55 178 82 Normalized FFO attributable to common stockholders $ 67,019 $ 60,759 $ 131,806 $ 119,049 Non-real estate depreciation and amortization 556 641 1,016 1,314 Non-cash interest amortization 5 747 897 1,458 1,791 Provision for bad debt, net 16 57 159 (22) Straight-line rent, net (1,327) (1,194) (2,536) (2,289) Stock-based compensation 3,356 2,627 7,055 5,647 Unconsolidated JV non-cash items 6 (242) (354) (513) (711) Normalized FFO adjusted for non-cash items $ 70,125 $ 63,433 $ 138,445 $ 124,779 2nd generation TI (5,051) (4,748) (9,950) (9,937) Leasing commissions paid (3,475) (3,804) (7,242) (4,997) Capital additions (4,557) (6,077) (7,177) (8,096) FAD $ 57,042 $ 48,804 $ 114,076 $ 101,749 FFO per common share - diluted $ 0.38 $ 0.42 $ 0.75 $ 0.83 Normalized FFO per common share - diluted $ 0.45 $ 0.43 $ 0.88 $ 0.84 FFO weighted average common shares outstanding - diluted 7 150,545 142,914 150,203 141,323 1 Acquisition and pursuit costs include third-party and travel costs related to the pursuit of acquisitions and developments. 2 Includes costs incurred related to the Merger. 3 Non-routine legal costs include expenses related to two separate disputes; one with a contractor on a $59 million completed construction project and another with a tenant on a violation of use restrictions. Forfeited earnest money received related to a disposition that did not materialize. 4 Includes the Company's proportionate share of acquisition and pursuit costs related to unconsolidated joint ventures. 5 Includes the amortization of deferred financing costs, discounts and premiums, and non-cash financing receivable amortization. 6 Includes the Company's proportionate share of straight-line rent, net related to unconsolidated joint ventures. 7 The Company utilizes the treasury stock method which includes the dilutive effect of nonvested share-based awards outstanding of 806,310 and 806,487, respectively for the three and six months ended June 30, 2022. Cash Net Operating Income ("NOI") and Same Store Cash NOI Cash NOI and Same Store Cash NOI are key performance indicators. Management considers these to be supplemental measures that allow investors, analysts and Company management to measure unlevered property-level operating results. The Company defines Cash NOI as rental income, interest from financing receivables and property lease guaranty income less property operating expenses. Cash NOI excludes non-cash items such as above and below market lease intangibles, straight-line rent, lease inducements, financing receivable amortization, tenant improvement amortization and leasing commission amortization. The Company also excludes cash lease termination fees. Cash NOI is historical and not necessarily indicative of future results. Same Store Cash NOI compares Cash NOI for stabilized properties. Stabilized properties are properties that have been included in operations for the duration of the year-over-year comparison period presented. Accordingly, stabilized properties exclude properties that were recently acquired or disposed of, properties classified as held for sale, properties undergoing redevelopment, and newly redeveloped or developed properties. 28 Table of Contents The Company utilizes the redevelopment classification for properties where management has approved a change in strategic direction for such properties through the application of additional resources including an amount of capital expenditures significantly above routine maintenance and capital improvement expenditures. These properties are described in additional detail in Note 6 to the Condensed Consolidated Financial Statements included elsewhere in this report. Any recently acquired property will be included in the same store pool once the Company has owned the property for eight full quarters. Newly developed or redeveloped properties will be included in the same store pool eight full quarters after substantial completion. The following table reflects the Company's same store cash NOI for the three months ended June 30, 2022 and 2021. NUMBER OF PROPERTIES GROSS INVESTMENT at June 30, 2022 SAME STORE CASH NOI for the three months ended June 30, Dollars in thousands 2022 2021 Same store properties 181 $ 3,891,809 $ 70,808 $ 68,574 The following tables reconcile net income to same store NOI and the same store property metrics to the total owned real estate portfolio for the three months ended June 30, 2022 and 2021: Reconciliation of Same Store Cash NOI THREE MONTHS ENDED JUNE 30, Dollars in thousands 2022 2021 Net income $ 6,130 $ 23,096 Other income (expense) 7,479 (2,223) General and administrative expense 10,540 8,545 Depreciation and amortization expense 55,731 49,826 Other expenses 1 11,034 2,840 Straight-line rent revenue (1,327) (1,194) Joint venture properties 2,551 1,035 Other revenue 2 (1,961) (2,075) Cash NOI 90,177 79,850 Cash NOI not included in same store (19,369) (11,276) Same store cash NOI $ 70,808 $ 68,574 1 Includes acquisition and pursuit costs, merger-related costs, bad debt, above and below market ground lease intangible amortization, leasing commission amortization and ground lease straight-line rent expense. 2 Includes management fee income, interest, above and below market lease intangible amortization, lease inducement amortization, lease terminations and tenant improvement overage amortization. Reconciliation of Same Store Properties AS OF JUNE 30, 2022 Dollars in thousands PROPERTY COUNT GROSS INVESTMENT 1 SQUARE FEET OCCUPANCY Same store properties 181 $ 3,891,809 13,506,008 89.3 % Acquisitions 67 1,188,042 2,947,903 91.1 % Development completions 1 37,360 110,883 98.9 % Redevelopments 6 145,676 647,978 64.6 % Total owned real estate properties 255 $ 5,262,887 17,212,772 88.7 % 1 Excludes construction in progress, land held for development, corporate property and financing lease right-of-use assets unrelated to an imputed lease arrangement as a result of a sale leaseback transaction. 29 Table of Contents Results of Operations Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021 The Company’s results of operations for the three months ended June 30, 2022 compared to the same period in 2021 were impacted by acquisitions, developments, dispositions, gains on sale, and capital markets transactions. Revenues Rental income increased $12.1 million, or 9.5%, for the three months ended June 30, 2022 compared to the prior year period. This increase is comprised of the following: • Acquisitions in 2021 and 2022 contributed $13.8 million. • Leasing activity, including contractual rent increases, contributed $3.1 million. • Dispositions in 2021 and 2022 resulted in a decrease of $4.8 million. Interest from financing receivables, net increased $1.4 million, or 283.7%, from the prior year period as a result of two financing receivables acquired during 2021. Other operating income increased $0.3 million, or 12.8%, from the prior year period primarily as a result of variable parking and asset management fees. Expenses Property operating expenses increased $5.5 million, or 10.7%, for the three months ended June 30, 2022 compared to the prior year period primarily as a result of the following activity: • Acquisitions in 2021 and 2022 resulted in an increase of $5.7 million. • Increases in portfolio operating expenses as follows: ◦ Utilities expense of $0.7 million; ◦ Administrative, leasing commissions, and other legal expense of $0.5 million; ◦ Janitorial expense of $0.3 million; ◦ Compensation expense of $0.3 million; ◦ Security expense of $0.1 million; and ◦ Insurance expense of $0.1 million. • Dispositions in 2021 and 2022 resulted in a decrease of $2.2 million. General and administrative expenses increased approximately $2.0 million, or 23.3%, for the three months ended June 30, 2022 compared to the prior year period primarily as a result of the following activity: • Incentive-based awards increases of $0.7 million. • Compensation expense increases of $1.2 million, including $0.7 million of non-cash expense. • Net increases, including professional fees and other administrative costs, of $0.1 million. Merger-related costs totaled $7.1 million for the three months ended June 30, 2022. These costs, consisting primarily of legal, consulting, and banking services, were incurred in connection with the Merger with HTA. Depreciation and amortization expense increased $5.9 million, or 11.9%, for the three months ended June 30, 2022 compared to the prior year period primarily as a result of the following activity: • Acquisitions in 2021 and 2022 resulted in an increase of $7.1 million. • Various building and tenant improvement expenditures resulted in an increase of $2.7 million. • Dispositions in 2021 and 2022 resulted in a decrease of $1.5 million. • Assets that became fully depreciated resulted in a decrease of $2.4 million. 30 Table of Contents Other Income (Expense) Gains on sale of real estate properties In the second quarter of 2022, the Company recognized gains of approximately $8.5 million on the sale of two properties. In the second quarter of 2021, the Company recognized gains of approximately $21.0 million primarily related to the sale of two properties. Interest expense Interest expense increased $2.3 million, or 17.2%, for the three months ended June 30, 2022 compared to the prior year period. The components of interest expense are as follows: THREE MONTHS ENDED JUNE 30, CHANGE Dollars in thousands 2022 2021 $ % Contractual interest $ 13,950 $ 12,148 $ 1,802 14.8 % Net discount/premium accretion 79 49 30 61.2 % Deferred financing costs amortization 708 704 4 0.6 % Interest rate swap amortization 42 42 — — % Treasury hedge amortization 107 107 — — % Interest cost capitalization (108) (36) (72) 200.0 % Right-of-use assets financing amortization 765 247 518 209.7 % Total interest expense $ 15,543 $ 13,261 $ 2,282 17.2 % Contractual interest expense increased $1.8 million, or 14.8%, for the three months ended June 30, 2022 compared to the prior year period primarily as a result of the following activity: • The Company's Unsecured Term Loan due 2026, net of swaps, accounted for a decrease of approximately $0.1 million. • The Company's Unsecured Term Loan due 2024, net of swaps, accounted for an increase of approximately $0.2 million. • The Unsecured Credit Facility accounted for an increase of approximately $2.0 million due to an increased weighted average balance outstanding and an increase in the weighted average interest rate. • Mortgage note repayments, net of assumptions, accounted for a decrease of approximately $0.3 million. Impairment of Real Estate Properties Impairment of real estate properties in 2021 totaling approximately $5.1 million was associated with a redevelopment project in Nashville, Tennessee. Equity loss from unconsolidated joint ventures The Company recognized its proportionate share of losses from its unconsolidated joint ventures, including the TIAA Joint Venture during the second quarter of 2022. These losses are primarily attributable to non-cash depreciation expense. See Note 2 to the Condensed Consolidated Financial Statements accompanying this report for more details regarding the Company's unconsolidated joint ventures. Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021 The Company’s results of operations for the six months ended June 30, 2022 compared to the same period in 2021 were impacted by acquisitions, developments, dispositions, gains on sale, and capital markets transactions. Revenues Rental income increased $22.2 million, or 8.7%, for the six months ended June 30, 2022 compared to the prior year period. This increase is comprised of the following: • Acquisitions in 2021 and 2022 contributed $24.1 million. • Leasing activity, including contractual rent increases, contributed $7.4 million. • Dispositions in 2021 and 2022 resulted in a decrease of $9.3 million. 31 Table of Contents Interest from financing receivables, net increased $3.4 million, or 662.2%, from the prior year period as the result of two financing receivables acquired during 2021. Other operating income increased $0.8 million, or 19.1%, from the prior year period primarily as a result of variable parking and asset management fees. Expenses Property operating expenses increased $10.8 million, or 10.4%, for the six months ended June 30, 2022 compared to the prior year period primarily as a result of the following activity: • Acquisitions in 2021 and 2022 resulted in an increase of $10.3 million. • Increases in portfolio operating expenses as follows: ◦ Utilities expense of $1.6 million; ◦ Administrative, leasing commissions, and other legal expense of $1.1 million; ◦ Janitorial expense of $0.6 million; ◦ Property tax expense increase of $0.5 million; ◦ Compensation expense of $0.4 million; ◦ Maintenance and repair expense of $0.3 million; ◦ Security expense of $0.3 million; and ◦ Insurance expense of $0.2 million. • Dispositions in 2021 and 2022 resulted in a decrease of $4.5 million. General and administrative expenses increased approximately $4.5 million, or 26.6%, for the six months ended June 30, 2022 compared to the prior year period primarily as a result of the following activity: • Incentive-based awards increases of $1.5 million. • Compensation expense increases of $2.6 million, including $1.4 million of non-cash expense. • Net increases, including professional fees and other administrative costs, of $0.4 million. Merger-related costs totaled $13.2 million for the six months ended June 30, 2022. These costs consisted primarily of legal, consulting, and banking services incurred in connection with the Merger with HTA. Depreciation and amortization expense increased $9.9 million, or 9.9%, for the six months ended June 30, 2022 compared to the prior year period primarily as a result of the following activity: • Acquisitions in 2021 and 2022 resulted in an increase of $12.6 million. • Various building and tenant improvement expenditures resulted in an increase of $5.5 million. • Dispositions in 2021 and 2022 resulted in a decrease of $3.2 million. • Assets that became fully depreciated resulted in a decrease of $5.0 million. 32 Table of Contents Other Income (Expense) Gains on sale of real estate properties Gains on the sale of real estate properties in 2022 totaling approximately $53.3 million primarily related to the sale of four real estate properties. Gains on the sale of real estate properties in 2021 totaling approximately $39.9 million primarily related to the sale of four real estate properties. Interest expense Interest expense increased $2.7 million, or 10.1%, for the six months ended June 30, 2022 compared to the prior year period. The components of interest expense are as follows: SIX MONTHS ENDED JUNE 30, CHANGE Dollars in thousands 2022 2021 $ % Contractual interest $ 26,452 $ 24,389 $ 2,063 8.5 % Net discount/premium accretion 129 96 33 34.4 % Deferred financing costs amortization 1,419 1,402 17 1.2 % Interest rate swap amortization 84 84 — — % Treasury hedge amortization 213 213 — — % Interest cost capitalization (145) (154) 9 (5.8) % Right-of-use assets financing amortization 1,052 493 559 113.4 % Total interest expense $ 29,204 $ 26,523 $ 2,681 10.1 % Contractual interest expense increased $2.1 million, or 8.5%, for the six months ended June 30, 2022 compared to the prior year period primarily as a result of the following activity: • The Company's Unsecured Term Loan due 2026, net of swaps, accounted for a decrease of approximately $0.3 million. • The Company's Unsecured Term Loan due 2024, net of swaps, accounted for an increase of approximately $0.2 million. • The Unsecured Credit Facility accounted for an increase of approximately $2.7 million due to an increased weighted average balance outstanding and an increase in the weighted average interest rate. • Mortgage note repayments, net of assumptions, accounted for a decrease of approximately $0.5 million. Impairment of Real Estate Properties Impairment of real estate properties in 2021 totaling approximately $5.9 million was associated with the disposal of one property totaling $0.8 million and $5.1 million associated with a redevelopment project in Nashville, Tennessee. Equity loss from unconsolidated joint ventures The Company recognized its proportionate share of losses from its unconsolidated joint ventures, including the TIAA Joint Venture during the first quarter of 2022. These losses are primarily attributable to non-cash depreciation expense. See Note 2 to the Condensed Consolidated Financial Statements accompanying this report for more details regarding the Company's unconsolidated joint ventures. Interest and other income (expense), net In the first quarter of 2021, the Company recorded approximately $0.5 million from a forfeited earnest money deposit.