Healthcare Realty Trust Inc 10-K

Item 7. 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 SEC, as well as information included in oral statements or other written statements made, or to be made, by senior 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” and other comparable terms. These forward-looking statements are based on the current plans and expectations of management and are subject to a number of risks and uncertainties that could materially affect the Company’s current plans and expectations and future financial condition and results. Such risks and uncertainties as more fully discussed in Item 1A “Risk Factors” of this report and in other reports filed by the Company with the SEC from time to time include, among other things, the following: Merger and Integration Risks • The Company incurred substantial expenses related to the Merger; • The Company may be unable to integrate the businesses of Legacy HR and Legacy HTA successfully and realize the anticipated synergies and related benefits of the Merger or do so within the anticipated timeframe; • The Company may be unable to retain key employees; • The trading price of shares of common stock of the Company may be affected by factors different from those that affected the price of shares of Legacy HR's common stock or Legacy HTA’s common stock before the Merger; and • The Company cannot assure you that it will be able to continue paying dividends at or above the rates paid by Legacy HR and Legacy HTA. Risk relating to our business and operations • The Company's expected results may not be achieved; • The Company’s revenues depend on the ability of its tenants under its leases to generate sufficient income from their operations to make rental payments to the Company; • Pandemics, such as COVID-19 and other pandemics that may occur in the future, and measures intended to prevent their spread or mitigate their severity could have a material adverse effect on the Company's business, results of operations, cash flows and financial condition; • Owning real estate and indirect interests in real estate is subject to inherent risks; • The Company may incur impairment charges on its real estate properties or other assets; • The Company has properties subject to purchase options that expose it to reinvestment risk and reduction in expected investment returns; • If the Company is unable to promptly re-let its properties, if the rates upon such re-letting are significantly lower than the previous rates or if the Company is required to undertake significant expenditures or make significant leasing concessions to attract new tenants, then the Company’s business, consolidated financial condition and results of operations would be adversely affected; • Certain of the Company’s properties are special purpose healthcare facilities and may not be easily adaptable to other uses; • The Company has, and in the future may have more, exposure to fixed rent escalators, which could lag behind inflation and the growth in operating expenses such as real estate taxes, utilities, insurance, and maintenance expense; • The Company’s real estate investments are illiquid and the Company may not be able to sell properties strategically targeted for disposition; • The Company is subject to risks associated with the development and redevelopment of properties; • The Company may make material acquisitions and undertake developments and redevelopments that may involve the expenditure of significant funds and may not perform in accordance with management’s expectations; 25 • The Company is exposed to risks associated with geographic concentration; • Many of the Company’s leases are dependent on the viability of associated health systems. Revenue concentrations relating to these leases expose the Company to risks related to the financial condition of the associated health systems; • Many of the Company’s properties are held under ground leases. These ground leases contain provisions that may limit the Company’s ability to lease, sell, or finance these properties; • The Company may experience uninsured or underinsured losses; • Damage from catastrophic weather and other natural events, whether caused by climate change or otherwise, could result in losses to the Company; and • The Company faces risks associated with security breaches through cyber attacks, cyber intrusions, or otherwise, as well as other significant disruptions of its information technology networks and related systems. Risks relating to our capital structure and financings • The Company has incurred significant debt obligations and may incur additional debt and increase leverage in the future; • Covenants in the Company’s debt instruments limit its operational flexibility, and a breach of these covenants could materially affect the Company’s consolidated financial condition and results of operations; • If lenders under the Unsecured Credit Facility fail to meet their funding commitments, the Company’s operations and consolidated financial position would be negatively impacted; • The unavailability of equity and debt capital, volatility in the credit markets, increases in interest rates, or changes in the Company’s debt ratings could have an adverse effect on the Company’s ability to meet its debt payments, make dividend payments to stockholders or engage in acquisition and development activity; • Increases in interest rates could have a material adverse effect on the Company's cost of capital; • The Company's swap agreements may not effectively reduce its exposure to changes in interest rates; • The Company has entered into joint venture agreements that limit its flexibility with respect to jointly owned properties and expects to enter into additional such agreements in the future; • The U.S. federal income tax treatment of the cash that the Company might receive from cash settlement of a forward equity agreement is unclear and could jeopardize the Company's ability to meet the REIT qualification requirements; and • In case of our bankruptcy or insolvency, any forward equity agreements will automatically terminate, and the Company would not receive the expected proceeds from any forward sale of shares of its common stock. Risks relating to government regulations • The Company's property taxes could increase due to reassessment or property tax rate changes; • Trends in the healthcare service industry may negatively affect the demand for the Company’s properties, lease revenues and the values of its investments; • The costs of complying with governmental laws and regulations may adversely affect the Company's results of operations; • Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code; • If the Company fails to remain qualified as a REIT, the Company will be subject to significant adverse consequences, including adversely affecting the value of its common stock; • The Company’s articles of incorporation, as well as provisions of the Maryland General Corporation Law ("MGCL"), contain limits and restrictions on transferability of the Company’s common stock which may have adverse effects on the value of the Company’s common stock; • Complying with the REIT requirements may cause the Company to forego otherwise attractive opportunities; • The prohibited transactions tax may limit the Company's ability to sell properties; • New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more difficult or impossible for the Company to qualify as a REIT; and 26 • New and increased transfer tax rates may reduce the value of the Company’s properties. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in the Company’s filings and reports, including, without limitation, estimates and projections regarding the performance of development projects the Company is pursuing. Overview The Company owns and operates properties that facilitate the delivery of healthcare services in primarily outpatient settings. To execute its strategy, the Company engages in a broad spectrum of integrated services including leasing, management, acquisition, financing, development and redevelopment of such properties. The Company seeks to generate stable, growing income and lower the long-term risk profile of its portfolio of properties by focusing on facilities primarily located on or near the campuses of acute care hospitals associated with leading health systems. The Company seeks to reduce financial and operational risk by owning properties in high-growth markets with a broad tenant mix that includes over 30 physician specialties, as well as surgery, imaging, cancer, and diagnostic centers. As described in the Explanatory Note above and elsewhere in this report, on July 20, 2022, Legacy HR and Legacy HTA completed a merger between the companies in which Legacy HR merged with and into a wholly-owned subsidiary of Legacy HTA, with Legacy HR continuing as the surviving entity and a wholly-owned subsidiary of Legacy HTA. Immediately following the Merger, Legacy HTA changed its name to “Healthcare Realty Trust Incorporated.” For accounting purposes, the Merger was treated as a “reverse acquisition” in which Legacy HR was considered the acquirer. Accordingly, the information discussed in this section reflects, for periods prior to the closing of the Merger, the financial condition and results of operations of Legacy HR, and for periods from the closing of the Merger, that of the consolidated company. This section is organized in the following sections: • Liquidity and Capital Resources • Trends and Matters Impacting Operating Results • Results of Operations • Non-GAAP Financial Measures and Key Performance Indicators • Application of Critical Accounting Policies to Accounting Estimates Liquidity and Capital Resources The Company monitors its liquidity and capital resources and considers several indicators in its assessment of capital markets for financing acquisitions and other operating activities. The Company considers, among other factors, its leverage ratios and lending covenants, dividend payout percentages, interest rates, underlying treasury rate, debt market spreads and cost of equity capital to compare its operations to its peers and to help identify areas in which the Company may need to focus its attention. Sources and Uses of Cash The Company's revenues are derived from its real estate property portfolio based on contractual arrangements with its tenants. These sources of revenue represent the Company's primary source of liquidity to fund its dividends and its operating expenses, including interest incurred on debt, principal payments on debt, general and administrative costs, capital expenditures and other expenses incurred in connection with managing its existing portfolio and investing in additional properties. To the extent additional investments are not funded by these sources, the Company will fund its investment activity generally through equity or debt issuances either in the public or private markets, property dispositions or through proceeds from the Unsecured Credit Facility. The Company expects to continue to meet its liquidity needs, including capital for additional investments, tenant improvement allowances, operating and finance lease payments, paying dividends, and funding debt service, through 27 cash on hand, cash flows from operations and the cash flow sources addressed above. See Note 4 to the Consolidated Financial Statements for additional discussion of operating and financing lease payment obligations. See "Trends and Matters Impacting Operating Results" for additional information regarding the Company's sources and uses of cash. Dividends paid by the Company for the year ended December 31, 2022 were funded from cash flows from operations and the Unsecured Credit Facility, as cash flows from operations were not adequate to fully fund dividends, primarily as a result of merger-related costs paid during 2022. The Company expects that cash flows from property operations will generate sufficient cash flows such that dividends for the full year 2023 can be funded by cash flows from operations or other sources of liquidity described above. The Company also had unencumbered real estate assets with a gross book value of approximately $13.8 billion at December 31, 2022, of which a portion could serve as collateral for secured mortgage financing. The Company believes that its liquidity and sources of capital are adequate to satisfy its cash requirements. The Company cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to the Company in sufficient amounts to meet its liquidity needs. The Company has exposure to variable interest rates and its common stock price is impacted by the volatility in the stock markets. However, the Company’s leases, which provide its main source of income and cash flow, have terms of approximately one to 20 years and have lease rates that generally increase on an annual basis at fixed rates or based on consumer price indices. Operating Activities Cash flows provided by operating activities for the two years ended December 31, 2022 and 2021 were $272.7 million and $232.6 million, respectively. Several items impact cash flows from operating activities including, but not limited to, cash generated from property operations, merger-related costs, interest payments and the timing related to the payment of invoices and other expenses and receipt of tenant rent. 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 consolidated results of operations and cash flows could be adversely affected. See "Trends and Matters Impacting Operating Results" for additional information regarding the Company's operating activities. Investing Activities A summary of the significant transactions impacting investing activities for the twelve months ended December 31, 2022 is listed below. See Note 5 to the Consolidated Financial Statements for more detail on these activities. 28 The following table details the acquisitions for the year ended December 31, 2022: Dollars in thousands ASSOCIATED HEALTH SYSTEM/TENANCY 1 DATE ACQUIRED PURCHASE PRICE SQUARE FOOTAGE MILES TO CAMPUS Dallas, TX 2 Texas Health Resources 2/11/2022 $ 8,175 18,000 0.19 San Francisco, CA 3 Kaiser/Sutter Health 3/7/2022 114,000 166,396 0.90 to 3.30 Atlanta, GA Wellstar Health 4/7/2022 6,912 21,535 0.00 Denver, CO Centura Health 4/13/2022 6,320 12,207 2.40 Colorado Springs, CO 4 Centura Health 4/13/2022 13,680 25,800 0.80 to 1.70 Seattle, WA UW Medicine 4/28/2022 8,350 13,256 0.05 Houston, TX CommonSpirit 4/28/2022 36,250 76,781 1.70 Los Angeles, CA Cedars-Sinai Health Systems 4/29/2022 35,000 34,282 0.11 Oklahoma, OK Mercy Health 4/29/2022 11,100 34,944 0.18 Raleigh, NC 3 WakeMed/None 5/31/2022 27,500 85,113 0.25 to 12.30 Tampa. FL 4 BayCare Health 6/9/2022 18,650 55,788 0.23 Seattle, WA Evergreen Health 8/1/2022 4,850 10,593 0.24 Raleigh, NC WakeMed Health 8/9/2022 3,783 11,345 0.24 Jacksonville, FL Ascension Health 8/9/2022 18,195 34,133 0.03 Atlanta, GA Wellstar Health 8/10/2022 11,800 43,496 0.11 Denver, CO Centura Health 8/11/2022 14,800 34,785 2.10 Raleigh, NC Duke Health 8/18/2022 11,375 31,318 0.19 Nashville, TN Ascension Health 9/15/2022 21,000 61,932 0.80 Austin, TX HCA Healthcare 9/29/2022 5,450 15,000 0.03 Jacksonville, FL 2 Ascension Health 10/12/2022 3,600 6,200 0.10 Houston, TX Memorial Hermann Health 11/21/2022 5,500 28,369 0.00 Austin, TX 5 Ascension Health 12/28/2022 888 2,219 0.01 Denver, CO None 12/28/2022 16,400 39,692 3.01 Total investments in real estate $ 403,578 863,184 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 Represents a single-tenant property. 3 Includes three properties. 4 Includes two properties. 5 The Company acquired additional ownership in an existing building bringing the Company's ownership to 71.4%. 2022 Joint Venture Acquisitions The following table details the joint venture acquisitions for the year ended December 31, 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 3/7/2022 $ 67,175 110,865 0.00 to 3.30 50 % Los Angeles, CA 3 Valley Presbyterian Health 3/7/2022 33,800 103,259 1.30 50 % Total 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. Capital Funding In 2022, the Company funded $189.7 million toward the following expenditures: • $60.8 million toward development and redevelopment of properties; 29 • $46.4 million toward first generation tenant improvements and planned capital expenditures for acquisitions; • $33.6 million toward second generation tenant improvements; and • $48.9 million toward capital expenditures. See "Trends and Matters Impacting Operating Results" below for more detail. The following table details the dispositions for the year ended December 31, 2022: Dollars in thousands DATE DISPOSED SALES PRICE SQUARE FOOTAGE Loveland, CO 1, 6 2/24/2022 $ 84,950 150,291 San Antonio, TX 1 4/15/2022 25,500 201,523 GA, FL, PA 2 7/29/2022 133,100 316,739 GA, FL, TX 4 8/4/2022 160,917 343,545 Los Angeles, CA 2, 7 8/5/2022 134,845 283,780 Dallas, TX 4, 8 8/30/2022 114,290 189,385 Indianapolis, IN 3 8/31/2022 238,845 506,406 Dallas, TX 1 10/4/2022 104,025 291,328 Houston, TX 10/21/2022 32,000 134,910 College Station, TX 11/10/2022 49,177 122,942 El Paso, TX 12/22/2022 55,326 110,465 Atlanta, GA 5 12/22/2022 91,243 348,416 St. Louis, MO 12/28/2022 18,000 69,394 Total dispositions $ 1,242,218 3,069,124 1 Includes two properties. 2 Includes four properties. 3 Includes five properties. 4 Includes six properties. 5 Includes nine properties. 6 The Company deferred the tax gain through a 1031 exchange and reinvested the proceeds. 7 Values and square feet are represented at 100%. The Company retained a 20% ownership interest in the joint venture that purchased these properties. 8 Values and square feet are represented at 100%. The Company retained a 40% ownership interest in the joint venture that purchased these properties. Subsequent Dispositions 30 On January 12, 2023, the Company disposed of two medical office buildings, one in Tampa, Florida and one in Miami, Florida, with a combined total of 224,037 square feet for an aggregate purchase price of $93.3 million. On January 30, 2023, the Company disposed of a 36,691 square foot medical office building in Dallas, Texas for a purchase price of $19.2 million. The Company retained a 40% ownership interest in the joint venture that purchased this property. On February 10, 2023, the Company disposed of a 6,500 square foot medical office building in St. Louis, Missouri for a purchase price of $0.4 million. Financing Activities Common Stock Issuances The Company has in place an at-the-market ("ATM") equity offering program to sell shares of the Company’s common stock from time to time in at-the-market sales transactions. The Company has equity distribution agreements with various sales agents with respect to the ATM offering program with an aggregate sales amount of up to $750.0 million. As of December 31, 2022, $750.0 million remained available for issuance under the current ATM offering program. Legacy HR's ATM agreements are no longer in effect following the Merger on July 20, 2022. All of the activity in the following table was conducted pre-merger under the Legacy HR at-the-market program: WEIGHTED AVERAGE SALE PRICE per share SHARES PRICED SHARES SETTLED SHARES REMAINING TO BE SETTLED NET PROCEEDS in millions 2022 $ 31.73 — 727,400 — $ 22.3 Debt Activity Below is a summary of the significant debt financing activity for the twelve months ended December 31, 2022. See Note 10 to the Consolidated Financial Statements for additional information on financing activities. Mortgage Payoffs The following table details the mortgage note repayment activity for the twelve months ended December 31, 2022: (dollars in millions) TRANSACTION DATE PRINCIPAL REPAYMENT ENCUMBERED SQUARE FEET CONTRACTUAL INTEREST RATE Repayments in full: Los Angeles, CA 2/18/2022 $ (11.0) 56,762 4.70 % Loveland, CO 2/24/2022 (5.8) 80,153 6.17 % $ (16.8) 136,915 5.21 % Exchange Offer In connection with the Merger, the OP offered to exchange all validly tendered and accepted notes of each series previously issued by Legacy HR (the “Old HR Notes”) for (i) up to $250,000,000 of 3.875% Senior Notes due 2025 (the “2025 Notes”), (ii) up to $300,000,000 of 3.625% Senior Notes due 2028 (the “2028 Notes”), (iii) up to $300,000,000 of 2.400% Senior Notes due 2030 (the “2030 Notes”) and (iv) up to $300,000,000 of 2.050% Senior Notes due 2031 to be issued by the OP (the “2031 Notes” and, collectively, the “New HR Notes”) and solicited consents from holders of the Old HR Notes to amend the indenture governing the Old HR Notes to eliminate substantially all of the restrictive covenants in such indenture (the “Exchange Offers”). The New HR Notes were issued pursuant to an indenture dated July 22, 2022, among the OP, Legacy HTA and U.S. Bank Trust Company, National Association, as trustee, as supplemented by the first supplemental indenture, dated as of July 22, 2022, the second supplemental indenture, dated as of July 22, 2022, the third supplemental indenture, dated as of July 22, 2022 and the fourth supplemental indenture, dated as of July 22, 2022. Legacy HTA guaranteed the New HR Notes pursuant to (i) a guarantee of the 2025 Notes, (ii) a guarantee of the 2028 Notes, (iii) a guarantee of the 2030 Notes, and (iv) a guarantee of the 2031 Notes, each dated July 22, 2022. Legacy HTA and the OP filed a registration statement on Form S-4 (File No. 333-265593) relating to the issuance of the New HR Notes with the Securities and Exchange Commission (the “SEC”) on June 14, 2022, which was declared effective by the SEC on June 28, 2022. The following sets forth the results of the Exchange Offers: 31 Series of Old HR Notes Tenders and Consents Received as of the Expiration Date Percentage of Total Outstanding Principal Amount of Such Series of Old HR Notes 3.875 % Senior Notes due 2025 $235,016,000 94.01 % 3.625 % Senior Notes due 2028 $290,246,000 96.75 % 2.400 % Senior Notes due 2030 $297,507,000 99.17 % 2.050 % Senior Notes due 2031 $298,858,000 99.62 % Senior Notes Assumed with the Merger In connection with the Merger, the Company assumed senior notes ("Legacy Senior Notes") that were originated on various dates prior to the date of the Merger by the OP (formerly, Healthcare Trust of America Holdings, LP). These notes are all fully and unconditionally guaranteed by the Company and have semi-annual payment requirements. In addition, the Legacy Senior Notes carry customary restrictive financial covenants, including limitations on our ability to incur additional indebtedness and requirements to maintain a pool of unencumbered assets. In addition, the corresponding indentures provide for the ability to redeem the Legacy Senior Notes, subject to certain "make whole" call provisions. The Legacy Senior Notes assumed by the Company consist of the following: COUPON PRINCIPAL OUTSTANDING AS OF Dollars in thousands FACE VALUE 12/31/2022 12/31/2021 Senior Notes due 2026 3.50% $ 600,000 $ 600,000 $ — Senior Notes due 2027 3.75% 500,000 500,000 — Senior Notes due 2030 3.10% 650,000 650,000 — Senior Notes due 2031 2.00% 800,000 800,000 — $ 2,550,000 $ 2,550,000 $ — 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 “Unsecured 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 Unsecured Credit Facility restructured the parties’ existing bank facilities and added additional borrowing capacities for the Company following the Merger. The OP is the borrower under the Unsecured Credit Facility (in such capacity, the “Borrower”). • Legacy HR’s existing $700.0 million revolving credit facility under the Amended and Restated Credit Agreement, dated as of May 31, 2019 (as amended, restated, replaced, supplemented, or otherwise modified from time to time prior to July 20, 2022, the “Existing HR Revolving Credit Agreement”), by and among Legacy HR, the lenders party thereto from time to time and their assignees, as lenders, and Wells Fargo Bank, National Association, as the administrative agent (the “WF Administrative Agent”), was terminated, all outstanding obligations in respect thereof were deemed paid in full and all commitments thereunder were permanently reduced to zero and terminated. • Legacy HR’s existing $200.0 million term loan facility and existing $150.0 million term loan facility under the Amended and Restated Term Loan Agreement, dated as of May 31, 2019 (as amended, restated, replaced, supplemented, or otherwise modified from time to time prior to July 20, 2022, the “Existing HR Term Loan Agreement”), by and among Legacy HR, the lenders party thereto from time to time and their assignees, as lenders, and the WF Administrative Agent, in each, case, were deemed continued and assumed by the Borrower under the Unsecured Credit Facility, and the Existing HR Term Loan Agreement was terminated. 32 ◦ The existing $200.0 million term loan facility was amended to: (a) conform to the terms of the Borrower’s other term loan facilities under the Unsecured Credit Facility; (b) include two one-year extension options, resulting in a latest final maturity in May 2026; and (c) reprice to align with the pricing for the Borrower’s other term loan facilities under the Unsecured Credit Facility; and ◦ The existing $150.0 million term loan facility was amended to conform to the terms of the Borrower’s other term loan facilities under the Unsecured Credit Facility, and the existing maturity in June 2026 remains unchanged under the Unsecured Credit Facility. • Legacy HTA’s and the OP’s existing $1.0 billion revolving credit facility was upsized to $1.5 billion (the “Revolver”) pursuant to the Unsecured Credit Facility. The Revolver currently matures in October 2025, and the Unsecured Credit Facility adds an additional one-year extension option for the Revolver, for a total of two one-year extension options. • Legacy HTA’s and the OP’s existing $300.0 million term loan facility was deemed continued pursuant to the Unsecured Credit Facility and was amended to conform to the terms of the Borrower’s other term loan facilities under the Unsecured Credit Facility. The existing maturity in October 2025 remains unchanged under the Unsecured Credit Facility. • Legacy HTA’s and the OP’s existing $200.0 million term loan facility was deemed continued pursuant to the Unsecured Credit Facility and was amended to (a) conform to the terms of the Borrower’s other term loan facilities under the Unsecured Credit Facility; (b) extend the maturity from January 2024 to July 20, 2027; and (c) reprice to align with the pricing for the Borrower’s other term loan facilities under the Unsecured Credit Facility. • The Unsecured Credit Facility provides for a new $350.0 million delayed-draw term loan facility that is available to be drawn for 12 months after July 20, 2022 and has an initial maturity date of July 20, 2023, with two one-year extension options. As of December 31, 2022, the $350.0 million Unsecured Credit Facility was drawn in full. The terms of any delayed draw term loans funded thereunder conform to the terms of the Borrower’s other term loan facilities under the Unsecured Credit Facility, and the pricing for such delayed draw term loans aligns with the pricing for the Borrower’s other term loan facilities under the Unsecured Credit Facility. • The Unsecured Credit Facility provides for a new $300.0 million term loan facility that was funded on July 20, 2022 and has a maturity date of January 20, 2028, with no extension options. The terms of such term loan facility conform to the terms of the Borrower’s other term loan facilities under the Unsecured Credit Facility, and the pricing for such term loan facility aligns with the pricing for the Borrower’s other term loan facilities under the Unsecured Credit Facility. $1.125 Billion Asset Sale Term Loan The Company completed its draw of the $1.125 billion asset sale term loan on July 19, 2022. The principal balance as of September 30, 2022 was $423.0 million and was fully repaid on December 30, 2022. Interest Rate Swaps The Company has outstanding interest rate derivatives totaling $1.2 billion to hedge one-month SOFR. The following details the amount and rate of each swap (dollars in thousands): EXPIRATION DATE AMOUNT WEIGHTED AVERAGE RATE January 31, 2023 $ 300,000 1.42 % January 15, 2024 200,000 1.21 % May 1, 2026 100,000 2.15 % December 1, 2026 150,000 3.84 % June 1, 2027 150,000 4.13 % December 1, 2027 250,000 3.79 % $ 1,150,000 2.63 % 33 On February 16, 2023, the Company entered into a swap transaction with a notional amount of $50.0 million and a fixed rate of 4.16%. The swap agreement has an effective date of March 1, 2023 and a termination date of June 1, 2026. The following table details the Company's debt balances as of December 31, 2022: PRINCIPAL BALANCE CARRYING BALANCE 1 WEIGHTED YEARS TO MATURITY 2 CONTRACTUAL RATE EFFECTIVE RATE Senior Notes due 2025 $ 250,000 $ 249,115 2.3 3.88 % 4.12 % Senior Notes due 2026 3 600,000 571,587 3.6 3.50 % 4.94 % Senior Notes due 2027 3 500,000 479,553 4.5 3.75 % 4.76 % Senior Notes due 2028 300,000 296,852 5.0 3.63 % 3.85 % Senior Notes due 2030 3 650,000 565,402 7.1 3.10 % 5.30 % Senior Notes due 2030 299,500 296,385 7.2 2.40 % 2.72 % Senior Notes due 2031 300,000 295,547 8.2 2.05 % 2.25 % Senior Notes due 2031 3 800,000 632,693 8.2 2.00 % 5.13 % Total Senior Notes Outstanding 3,699,500 3,387,134 5.9 2.97 % 4.43 % $1.5 billion unsecured credit facility 4 5 385,000 385,000 4.8 SOFR + 0.95% 5.27 % $350 million unsecured term loan 5 350,000 349,114 2.6 SOFR + 1.05% 5.17 % $200 million unsecured term loan 200,000 199,670 3.4 SOFR + 1.05% 5.17 % $150 million unsecured term loan 150,000 149,495 3.4 SOFR + 1.05% 5.17 % $300 million unsecured term loan 3 300,000 299,936 3.8 SOFR + 1.05% 5.17 % $200 million unsecured term loan 3 200,000 199,362 4.5 SOFR + 1.05% 5.17 % $300 million unsecured term loan 5 300,000 297,869 5.0 SOFR + 1.05% 5.17 % Mortgage notes payable 84,122 84,247 2.0 4.07 % 3.97 % Total Outstanding Notes and Bonds Payable $ 5,668,622 $ 5,351,827 5.0 3.72 % 4.69 % 1 Balances are reflected net of discounts and debt issuance costs and include premiums. 2 Includes extension options. 3 Debt instruments assumed as part of the Merger with Legacy HTA on July 20, 2022. Amounts shown represent fair value adjustments. 4 As of December 31, 2022, the Company had $385.0 million borrowed under the Unsecured Credit Facility with a remaining borrowing capacity of $1.1 billion. 5 On July 20, 2022, the Company entered into the Unsecured Credit Facility which included a $1.5 billion revolving credit facility, replacing Legacy HR's $700.0 million credit facility. Debt Covenant Information The Company’s various debt agreements contain certain representations, warranties, and financial and other covenants customary in such debt agreements. Among other things, these provisions require the Company to maintain certain financial ratios and impose certain limits on the Company’s ability to incur indebtedness and create liens or encumbrances. As of December 31, 2022, the Company was in compliance with the financial covenant provisions under all of its various debt instruments. As of December 31, 2022, 99.7% of the Company’s principal balances were due after 2023, including extension options. Also, as of December 31, 2022, the Company's incurrence of total debt as defined in the senior notes due 2030 and 2031 [debt divided by (total assets less intangibles and accounts receivable)] was approximately 38.4% (cannot be greater than 60%) and debt service coverage [interest expense divided by (net income plus interest expense, taxes, depreciation and amortization, gains and impairments)] was approximately 3.1 times (cannot be less than 1.5x). The Company plans to manage its capital structure to maintain compliance with its debt covenants consistent with its current profile. Downgrades in ratings by the rating agencies could have a material adverse impact on the Company’s cost and availability of capital, which could in turn have a material adverse impact on consolidated results of operations, liquidity and/or financial condition. 34 Trends and Matters Impacting Operating Results Management monitors factors and trends important to the Company and the REIT industry in order to gauge their potential impact on the operations of the Company. Discussed below are some of the factors and trends that management believes may impact future operations of the Company. Acquisitions and Dispositions In 2022, the Company invested in 33 medical office buildings through acquisitions and investments in joint ventures. The total purchase price of the acquisitions was $504.6 million and the weighted average capitalization rate for these investments was 5.3%. The following bullets provide further detail of the 2022 acquisition activity. • The Company (exclusive of joint ventures) acquired 28 medical office buildings for purchase prices totaling $403.6 million, resulting in cash consideration paid of $399.2 million. • Through joint ventures, the Company acquired interests in five medical office buildings for purchase prices totaling $101.0 million, resulting in cash consideration paid of $99.2 million. The Company funded 50% of the consideration for these acquisitions. The Company disposed of 44 properties in 2022 for sales prices totaling $1.2 billion, including 10 properties contributed into joint ventures in which the Company maintained a non-controlling interest. These transactions yielded net cash proceeds of $1.1 billion, net of $45.7 million of closing costs and related adjustments and $48.9 million of retained joint venture interests. The weighted average capitalization rate for these properties was 4.8%. The Company calculates the capitalization rate for dispositions as the in-place cash net operating income divided by the sales price. The net proceeds of these sales was used to repay the $1.125 billion asset sale term loan. See the Company's discussion of the 2022 acquisition and disposition activity in Note 5 to the Consolidated Financial Statements. Development and Redevelopment Activity The table below details the Company’s development and redevelopment activity as of December 31, 2022. The information included in the table below represents management’s estimates and expectations at December 31, 2022, which are subject to change. The Company’s disclosures regarding certain projections or estimates of completion dates may not reflect actual results. ESTIMATED REMAINING FUNDINGS ESTIMATED TOTAL INVESTMENT APPROXIMATE SQUARE FEET Dollars in thousands NUMBER OF PROPERTIES TOTAL FUNDED DURING THE YEAR TOTAL AMOUNT FUNDED Development Activity Nashville, TN 1 $ 23,513 $ 25,359 $ 18,641 $ 44,000 106,194 Orlando, FL 1 2 9,477 16,633 $ 48,367 65,000 156,566 Raleigh, NC 1 4,807 13,625 $ 35,675 49,300 120,694 Orlando, FL 1 1,470 1,470 $ 24,430 25,900 45,000 Total $ 39,267 $ 57,087 $ 127,113 $ 184,200 428,454 Redevelopment Activity Tacoma, WA 1 $ 7,930 $ 12,253 $ 247 $ 12,500 56,000 Dallas, TX 1 4,672 12,132 5,368 17,500 217,114 Washington, DC 3 1,113 2,857 18,343 21,200 259,290 Total $ 13,715 $ 27,242 $ 23,958 $ 51,200 532,404 1 This project is funded through a construction note receivable. The Company funded an additional $7.8 million related to ongoing tenant improvements at previously completed projects. 35 The Company is in the planning stages with several health systems and developers regarding new development and redevelopment opportunities and expects one or more to begin in 2023. Total costs to develop or redevelop a typical medical office building can vary depending on the scope of the project, market rental terms, parking configuration, building amenities, asset type and geographic location. The Company’s disclosures regarding projections or estimates of completion dates and leasing may not be indicative of actual results. Security Deposits and Letters of Credit As of December 31, 2022, the Company held approximately $32.1 million in letters of credit and security deposits for the benefit of the Company in the event the obligated tenant fails to perform under the terms of its respective lease. Generally, the Company may, at its discretion and upon notification to the tenant, draw upon these instruments if there are any defaults under the leases. Expiring Leases The Company expects that approximately 15% of the leases in its portfolio will expire each year. In-place leases have a weighted average lease term of 8.9 years and a weighted average remaining lease term of 4.5 years. Demand for well-located real estate with complementary practice types and services remains consistent, and the Company's 2022 quarterly tenant retention statistics ranged from 72% to 86%. In 2023, the Company has 1,446 leases totaling 4.3 million square feet in its multi-tenant portfolio that are scheduled to expire. Of those leases, 73% are in on-campus buildings, which, in our experience, tend to have high tenant retention rates between 75% to 90%. The Company continues to emphasize its contractual rent increases for in-place leases. As of December 31, 2022 and 2021, the Company's contractual rental rate growth averaged 2.68% and 2.87% for in-place leases. In addition, the Company continued to see strong quarterly weighted average rental rate growth for renewing leases ("cash leasing spread") and expects the majority of its renewal rates to increase between 3.0% and 4.0%. In 2022, for all properties, including both Legacy HR and Legacy HTA, cash leasing spreads averaged 3.3%. In a further effort to maximize revenue growth and reduce its exposure to key expenses such as taxes and utilities, the Company carefully manages its balance of lease types. Gross leases, wherein the Company has full exposure to all operating expenses, comprise 8% of its lease portfolio. Modified gross or base year leases, in which the Company and tenant both pay a share of operating expenses, comprise 27% of the Company's leased portfolio. Net leases, in which tenants pay substantially all operating expenses, total 58% of the leased portfolio. Absolute net leases, in which tenants pay substantially all the building's operating and capital expenses, comprise 7%. Capital Expenditures Capital expenditures are long-term investments made to maintain and improve the physical and aesthetic attributes of the Company's owned properties. Examples of such improvements include, but are not limited to, material changes to, or the full replacement of, major building systems (exterior facade, building structure, roofs, elevators, mechanical systems, electrical systems, energy management systems, upgrades to existing systems for improved efficiency) and common area improvements (furniture, signage and artwork, bathroom fixtures and finishes, exterior landscaping, parking lots or garages). These additions are capitalized into the gross investment of a property and then depreciated over their estimated useful lives, typically ranging from 7 to 20 years. Capital expenditures specifically do not include recurring maintenance expenses, whether direct or indirect, related to the upkeep and maintenance of major building systems or common area improvements. Capital expenditures also do not include improvements related to a specific tenant suite, unless the improvement is part of a major building system or common area improvement. The Company invested $48.9 million, or $1.21 per square foot, in capital expenditures in 2022 and $19.6 million, or $1.15 per square foot, in capital expenditures in 2021. As a percentage of cash net operating income, 2022 and 2021 capital expenditures were 8.5% and 6.1%, respectively. For a reconciliation of cash net operating income, see "Same Store Cash NOI" in the "Non-GAAP Financial Measures and Key Performance Indicators" section as part of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations included in Part II of this report. 36 Tenant Improvements The Company may invest in tenant improvements for the purpose of refurbishing or renovating tenant space. The Company categorizes these expenditures into first and second generation tenant improvements. As of December 31, 2022, the Company had commitments of approximately $195.1 million that are expected to be spent on tenant improvements throughout the portfolio, excluding development properties currently under construction. First Generation Tenant Improvements & Planned Capital Expenditures for Acquisitions First generation tenant improvements and planned capital expenditures for acquisition spending totaled $46.4 million and $19.3 million for the years ended December 31, 2022 and 2021, respectively. First generation tenant improvements include build out costs related to suite space in shell condition. Planned capital expenditures for acquisitions include expected near-term fundings that were contemplated as part of the acquisition. Second Generation Tenant Improvements Second generation tenant improvements spending totaled $33.6 million in 2022, or 5.8% of total cash net operating income. In 2021, this spending totaled $26.4 million, or 8.3% of total cash net operating income. If the cost of a tenant improvement project exceeds a tenant improvement allowance, the Company generally offers the tenant the option to finance the excess over the lease term with interest or to reimburse the overage to the Company in a lump sum. In either case, such overages are amortized by the Company as rental income over the term of the lease. Interest earned on tenant overages is included in other operating income in the Company's Consolidated Statements of Income. The first and second generation tenant overage amount amortized to rent, including interest, totaled approximately $7.5 million in 2022, $5.9 million in 2021, and $6.6 million in 2020. Second generation, multi-tenant tenant improvement commitments in 2022 for renewals averaged $1.76 per square foot per lease year, ranging quarterly from $1.46 to $1.90. In 2021, these commitments averaged $1.53 per square foot per lease year, ranging quarterly from $1.27 to $1.87. In 2020, these commitments averaged $1.58 per square foot per lease year, ranging quarterly from $1.48 to $1.78. Second generation, multi-tenant tenant improvement commitments in 2022 for new leases averaged $5.74 per square foot per lease year, ranging quarterly from $4.84 to $7.07. In 2021, these commitments averaged $5.39 per square foot per lease year, ranging quarterly from $4.74 to $5.96. In 2020, these commitments averaged $5.52 per square foot per lease year, ranging quarterly from $4.07 to $6.40. Leasing Commissions In certain markets, the Company may pay leasing commissions to real estate brokers who represent either the Company or prospective tenants, with commissions generally equating to 4% to 6% of the gross lease value for new leases and 2% to 4% of the gross lease value for renewal leases. In addition, the Company pays its leasing employees incentive compensation when leases are executed that meet certain leasing thresholds. External leasing commissions are amortized to property operating expense, and internal leasing costs are amortized to general and administrative expense in the Company's Consolidated Statements of Income. In 2022, the Company paid leasing commissions of approximately $22.9 million, or $0.57 per square foot. In 2021, the Company paid leasing commissions of approximately $11.7 million, or $0.69 per square foot. As a percentage of total cash net operating income, leasing commissions paid for 2022 and 2021 were 0.9% and 2.8%, respectively. The amount of leasing commissions amortized over the term of the applicable leases totaled $27.2 million, $8.5 million and $7.4 million for the years ended December 31, 2022, 2021 and 2020, respectively. Rent Abatements Rent abatements, which generally take the form of deferred rent, are sometimes used to help induce a potential tenant to lease space in the Company's properties. Such abatements, when made, are amortized by the Company on a straight-line basis against rental income over the lease term. Rent abatements for 2022 totaled approximately $14.8 million, or $0.37 per square foot. Rent abatements for 2021 totaled approximately $4.6 million, or $0.27 per square foot. Rent abatements for 2020 totaled approximately $2.8 million, or $0.18 per square foot. 37 Single-Tenant Leases As of December 31, 2022, the Company had a total of 141 single-tenant leases, with a weighted average lease term of 12.1 years and a weighted average remaining lease term of 5.6 years. Thirteen single-tenant leases expire in 2023. Three of these have been renewed. The Company is in negotiations with five of the tenants and expects the leases to renew. One building was sold on February 10, 2023. The remaining four leases are expected to be sold or not renew during 2023. Operating Leases As of December 31, 2022, the Company was obligated to make rental payments under operating lease agreements consisting primarily of ground leases related to 167 real estate investments, excluding those ground leases the Company has prepaid. At December 31, 2022, the Company had 242 properties totaling 17.8 million square feet that were held under ground leases with a remaining weighted average term of 64.4 years, including renewal options. These ground leases typically have initial terms of 50 to 75 years with one or more renewal options extending the terms to 75 to 100 years, with expiration dates through 2119. Purchase Options The Company had approximately $100.4 million in real estate properties as of December 31, 2022 that were subject to exercisable purchase options. The Company has approximately $1.1 billion in real estate properties that are subject to purchase options that will become exercisable after 2022. Additional information about 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 DECEMBER 31, 2022 YEAR EXERCISABLE MOB INPATIENT FAIR MARKET VALUE METHOD 1 NON FAIR MARKET VALUE METHOD 2 TOTAL Current 3 3 2 $ 100,366 $ — $ 100,366 2023 2 — 36,171 — 36,171 2024 — — — — — 2025 6 1 88,412 44,459 132,871 2026 5 1 179,929 — 179,929 2027 4 — 110,125 — 110,125 2028 2 2 109,399 — 109,399 2029 2 1 81,794 — 81,794 2030 — — — — — 2031 3 1 108,769 — 108,769 2032 2 — 24,628 — 24,628 2033 and thereafter 4 10 — 334,634 — 334,634 Total 39 8 $ 1,174,227 $ 44,459 $ 1,218,686 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 15.6 years. 4 Includes two medical office buildings that are recorded in the line item Investment in financing receivable, net on the Company's Consolidated Balance Sheet. Debt Management The Company maintains a conservative and flexible capital structure that allows it to fund new investments and operate its existing portfolio. The Company has approximately $84.1 million of mortgage notes payable, most of which were assumed when the Company acquired properties. In 2023, the Company has approximately $34.3 million of mortgage notes payable that will mature or are able to be repaid without penalty. The Company will repay mortgages with cash on hand or borrowings under the Unsecured Credit Facility. 38 Impact of Inflation The Company is subject to the risk of inflation as most of its revenues are derived from long-term leases. Most of the Company's leases provide for fixed increases in base rents or increases based on the Consumer Price Index, and require the tenant to pay all or some portion of increases in operating expenses. The Company believes that these provisions mitigate the impact of inflation. However, there can be no assurance that the Company's ability to increase rents or recover operating expenses will keep pace with inflation. The Company's leases have a weighted average lease term remaining of approximately 4.5 years. The Company has 93.6% of leases that provide for fixed base rent increases and 6.4% that provide for Consumer Price Index-based rent increases as of December 31, 2022. New Accounting Pronouncements See Note 1 to the Consolidated Financial Statements for information on new accounting standards including both standards that the Company adopted during the year and those that have not yet been adopted. The Company continues to evaluate the impact of the new standards that have not yet been adopted. Other Items Impacting Operations General and administrative expenses will fluctuate quarter-to-quarter. In the first quarter of each year, general and administrative expense includes increases for certain expenses such as payroll taxes and healthcare savings account fundings. The Company expects these customary expenses to increase by approximately $0.8 million in the first quarter of 2023. Approximately $0.5 million is not expected to recur in subsequent quarters in 2023. Results of Operations Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 The Company’s consolidated results of operations for 2022 compared to 2021 were significantly impacted by the Merger, acquisitions, dispositions, gain on sales and impairment charges recorded on real estate properties, and capital markets transactions. Revenues Rental income increased $387.1 million, or 74.4%, to approximately $907.5 million compared to $520.3 million in the prior year and is comprised of the following: • Acquisitions in 2021 and 2022 contributed $49.2 million. • Leasing activity contributed $16.3 million. • Dispositions in 2021 and 2022 resulted in a decrease of $23.6 million. • Impact from the Merger contributed $345.2 million. Interest income increased $7.3 million, or 173.9%, from the prior year period and is comprised of the following activity: • Two financing receivables acquired during 2021 contributed $3.9 million. • Interest from notes receivables assumed in the Merger totaling $3.4 million. Other operating income increased $3.4 million, or 33.2%, from the prior year primarily as a result of income from transient parking and management fees assumed with the Merger. Expenses Property operating expenses increased $131.8 million, or 62.1%, from the prior year primarily as a result of the following activity: • Acquisitions in 2021 and 2022 resulted in an increase of $19.6 million. • Increases in portfolio operating expenses as follows: ◦ Utilities expense of $4.0 million; ◦ Compensation of $2.3 million; ◦ Leasing commission amortization of $1.9 million; ◦ Janitorial expense of $1.2 million; 39 ◦ Maintenance and repair expense of $0.8 million; ◦ Property tax of $0.6 million; ◦ Security of $0.5 million; ◦ Administrative and other legal expense of $0.5 million; and ◦ Insurance expense of $0.4 million. • Dispositions in 2021 and 2022 resulted in a decrease of $11.9 million. • Impact from the Merger resulted in an increase of $111.9 million. General and administrative expenses increased approximately $18.6 million, or 54.4%, from the prior year primarily as a result of the following activity: • Compensation expense increased $6.3 million, including $3.5 million of non-cash expense. • Net increases, including professional fees, audit services, travel and other administrative costs of $4.9 million. • Impact from the Merger resulted in an increase of $7.4 million. Merger-related costs totaled $103.4 million consisting primarily of legal, consulting, and banking services incurred in connection with the Merger. Depreciation and amortization expense increased $250.4 million, or 123.5%, from the prior year primarily as a result of the following activity: • Acquisitions in 2021 and 2022 resulted in increases of $25.9 million. • Various building and tenant improvement expenditures caused increases of $10.1 million. • Dispositions in 2021 and 2022 resulted in decreases of $7.8 million. • Assets that became fully depreciated resulted in decreases of $10.4 million. • Impact from the Merger, including purchase accounting fair value adjustments, resulted in an increase of $232.6 million. Other Income (Expense) Other income (expense), increased $79.6 million, or 527.6%, from the prior year mainly due to the following activity: Gain on Sales of Real Estate Properties Gain on sales of real estate properties totaling approximately $270.3 million and $55.9 million are associated with the sales of 10 and 12 real estate properties during 2022 and 2021, respectively. Interest Expense Interest expense increased $93.6 million for the year ended December 31, 2022 compared to the prior year. The components of interest expense are as follows: CHANGE Dollars in thousands 2022 2021 $ % Contractual interest $ 118,085 $ 48,740 $ 69,345 142.3 % Net discount/premium accretion 18,227 105 18,122 17,259.0 % Debt issuance costs amortization 4,256 2,873 1,383 48.1 % Amortization of interest rate swap settlement 168 168 — — % Amortization of treasury hedge settlement 427 427 — — % Fair value derivative 4,057 — 4,057 N/A Interest cost capitalization (1,409) (221) (1,188) 537.6 % Interest on lease liabilities 2,880 1,032 1,848 179.1 % Total interest expense $ 146,691 $ 53,124 $ 93,567 176.1 % Contractual interest increased $69.3 million, or 142.3%, primarily as a result of the following activity: 40 • Senior notes and unsecured term loans assumed in the Merger accounted for an increase of approximately $51.9 million. • New unsecured term loans executed with the Unsecured Credit Facility accounted for an increase of approximately $9.9 million. • The Unsecured Credit Facility accounted for an increase of approximately $15.4 million due to an increased weighted average balance outstanding and an increase in the weighted average interest rate. • Active interest rate derivatives accounted for a decrease of $6.7 million. • Mortgage note repayments, net of assumptions, accounted for a decrease of approximately $1.2 million. Loss on extinguishment of debt The Company recognized a loss on early extinguishment of debt in 2022 of approximately $2.4 million, primarily related to the amendment of the Unsecured Credit Facility and the early extinguishment of two mortgage notes payable. Impairment of Real Estate Assets Impairment of real estate assets in 2022 totaling approximately $54.4 million is associated with completed or planned disposition activity. Impairment of real estate assets in 2021 totaling approximately $17.1 million in 2021 is associated with the sales of five real estate properties and one redevelopment property. Equity income (loss) from unconsolidated joint ventures The Company recognizes its proportionate share of losses from its unconsolidated joint ventures. The losses are primarily attributable to non-cash depreciation expense. See Note 5 for more details regarding the Company's unconsolidated joint ventures. Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 The Company's discussion regarding the comparison of the year ended December 31, 2021 compared to the year ended December 31, 2020 was previously disclosed beginning on page 38 of Legacy HR's Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 16, 2022, and is incorporated herein by reference. 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 Consolidated Financial Statements and other financial data included elsewhere in this Annual Report on Form 10-K. 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) 41 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-real estate depreciation and amortization, deferred financing fees amortization, share-based compensation expense and provision for bad debts, net; and subtracting straight-line rent income, net of expense, and maintenance capital expenditures, including second generation tenant improvements, capital expenditures and leasing commissions paid. 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 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 gains on sales of real estate, impairments and 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. 42 The table below reconciles net income attributable to common stockholders to FFO, Normalized FFO and FAD attributable to common stockholders for the years ended December 31, 2022, 2021, and 2020. YEAR ENDED DECEMBER 31, Amounts in thousands, except per share data 2022 2021 2020 Net income attributable to common stockholders $ 40,897 $ 66,659 $ 72,195 Gain on sales of real estate assets (270,271) (55,940) (70,361) Impairments 54,427 17,101 — Real estate depreciation and amortization 459,211 208,155 194,574 Non-controlling income from operating partnership units (5) — — Proportionate share of unconsolidated joint ventures 12,722 5,541 564 FFO attributable to common stockholders 296,981 241,516 196,972 Acquisition and pursuit costs 1 3,229 3,930 2,561 Merger-related costs 103,380 — — Fair value of debt instruments 21,248 — — Lease intangible amortization 3 1,028 162 690 Non-routine legal costs/forfeited earnest money received 2 771 (35) — Debt financing costs 4 3,145 283 21,920 Unconsolidated JV normalizing items 5 330 225 16 Normalized FFO attributable to common stockholders 430,112 246,081 222,159 Non-real estate depreciation and amortization 2,217 2,397 3,154 Non-cash interest expense amortization 6 5,129 3,182 3,691 Provision for bad debt, net 516 73 207 Straight-line rent income, net (20,124) (4,303) (2,245) Share-based compensation 14,294 10,729 9,922 Proportionate share of unconsolidated joint ventures (1,206) (1,357) 27 Normalized FFO adjusted for non-cash items 430,938 256,802 236,915 2nd Generation tenant improvements (33,620) (26,363) (26,209) Leasing commissions paid (22,929) (11,742) (10,369) Capital expenditures (48,913) (19,582) (21,758) Maintenance capital expenditures (105,462) (57,687) (58,336) FAD attributable to common stockholders $ 325,476 $ 199,115 $ 178,579 FFO per common share - diluted $ 1.17 $ 1.68 $ 1.46 Normalized FFO per common share - diluted $ 1.69 $ 1.71 $ 1.65 Weighted average common shares outstanding - diluted 7 254,622 143,618 134,835 1 Acquisition and pursuit costs include third party and travel costs related to the pursuit of acquisitions and developments. 2 Non-routine legal costs include expenses related to disputes with a contractor and a tenant relating to a violation of use restrictions. Forfeited earnest money received related to a disposition that did not close. 3 Includes above or below market lease intangibles that are identified upon building acquisitions. 4 Amount for 2020 includes the loss on extinguishment of debt on the extinguishment of the Senior Notes due 2023 of $21.5 million and double interest incurred on the timing of issuance of the Senior Notes due 2031 and the redemption of the Senior Notes due 2023 of $0.4 million. 5 Includes the Company's proportionate share of acquisition and pursuit costs related to unconsolidated joint ventures. 6 Includes the amortization of deferred financing costs, discounts and premiums, and non-cash financing receivable amortization. 7 The Company utilizes the treasury stock method which includes the dilutive effect of nonvested share-based awards outstanding of 748,385, 907,393, and 828,506 for the years ended December 31, 2022, 2021, and 2020, respectively. Same Store Cash NOI Cash NOI and same store cash NOI are key performance indicators. Management considers same store cash NOI a supplemental measure because it allows investors, analysts and Company management to measure unlevered property-level operating results. Cash NOI excludes general and administrative expenses, interest expense, depreciation and amortization, gains and losses from property sales, property management fees and other revenues and expenses not specifically related to the property portfolio. Cash NOI also excludes non-cash items such as straight-line rent, above and below market lease intangibles, leasing commission amortization, lease inducements, 43 and tenant improvement amortization. The Company also excludes cash lease termination fees. Same store 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. Legacy HTA properties that met the same store criteria are included in both periods shown, on a proforma basis, as if they were owned by the Company for the full analysis period. 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. The Company's same store calculation included 593 properties with a gross investment of $11.9 billion. Cash NOI for the years ended December 31, 2022 and 2021 was $722.6 million and $705.0 million, respectively, resulting in year-over-year growth of 2.5%. The following tables reconcile same store cash NOI to the respective line items in the Consolidated Statements of Income and the same store property count to the total owned real estate portfolio: Reconciliation of Same Store Cash NOI YEAR ENDED DECEMBER 31, Dollars in thousands 2022 2021 PERCENTAGE GROWTH Net income attributable to common stockholders $ 40,897 $ 66,659 Other income (expense) (64,519) 15,089 General and administrative expense 52,734 34,152 Depreciation and amortization expense 453,082 202,714 Other expenses 1 120,576 14,164 Straight-line rent revenue (23,498) (5,801) Joint venture properties 15,222 8,299 Other revenue 2 (16,577) (8,117) Cash NOI 577,917 327,159 76.6 % Pre-merger Legacy HTA NOI 281,780 497,354 Proforma Cash NOI 859,697 824,513 4.3 % Cash NOI not included in same store (127,391) (101,823) 25.1 % Same store and redevelopment cash NOI 732,306 722,690 1.3 % Redevelopment NOI (9,743) (17,737) (45.1) % Same store cash NOI $ 722,563 $ 704,953 2.5 % 1 Includes acquisition and pursuit costs, bad debt, above and below market ground lease intangible amortization, leasing commission amortization, non-cash adjustments for financing receivables and ground lease straight-line rent. 2 Includes management fee income, interest, above and below market lease intangible amortization, lease inducement amortization, lease terminations and tenant improvement overage amortization. 44 Reconciliation of Same Store Property Count AS OF DECEMBER 31, 2022 Dollars and square feet in thousands PROPERTY COUNT GROSS INVESTMENT 1 SQUARE FEET OCCUPANCY Same store properties 593 $ 11,933,696 35,227 89.3 % Acquisitions 74 1,259,600 3,399 87.1 % Development completions 6 172,845 410 86.8 % Redevelopment 15 307,229 1,314 59.4 % Total owned real estate properties 688 $ 13,673,370 40,350 87.8 % 1 Gross investment excludes land held for development, construction in progress, corporate property, and investment in financing receivables. Gross investment also includes a $8.7 million imputed lease included in the financing lease right-of-use assets. Application of Critical Accounting Policies to Accounting Estimates The Company’s Consolidated Financial Statements are prepared in accordance with GAAP and the rules and regulations of the SEC. In preparing the Consolidated Financial Statements, management is required to exercise judgment and make assumptions that impact the carrying amount of assets and liabilities and the reported amounts of revenues and expenses reflected in the Consolidated Financial Statements. Management routinely evaluates the estimates and assumptions used in the preparation of its Consolidated Financial Statements. These regular evaluations consider historical experience and other reasonable factors and use the seasoned judgment of management personnel. Management has reviewed the Company’s critical accounting policies with the Audit Committee of the Board of Directors. Management believes the following paragraphs in this section describe the application of critical accounting policies and estimates by management to arrive at the critical accounting estimates reflected in the Consolidated Financial Statements. The Company’s accounting policies are more fully discussed in Note 1 to the Consolidated Financial Statements. Principles of Consolidation The Company’s Consolidated Financial Statements include the accounts of the Company, its wholly owned subsidiaries, joint ventures, and partnerships where the Company controls the operating activities. All material intercompany accounts and transactions have been eliminated. Merger-Related Accounting Acquirer Determination The Merger was considered a reverse acquisition where Legacy HR was considered the accounting acquirer even though Legacy HTA was the legal issuer of equity interests in connection with the Merger. Legacy HR was identified as the accounting acquirer after consideration of various indicators outlined in Accounting Standards Codification, Topic 805 as they apply to the specific facts and circumstances of the Merger. The strongest factors supporting the treatment of Legacy HR as the accounting acquirer included that the executive team of the consolidated Company will be comprised of then-current Legacy HR senior management (with none of the then-current Legacy HTA executives expected to retain their current positions after the Merger) and the thirteen member board of directors of the consolidated company would be comprised of all nine members of the Legacy HR Board serving immediately prior to the effective time of the Merger and four members selected by Legacy HTA. Capitalization of Costs GAAP generally allows for the capitalization of various types of costs. The rules and regulations on capitalizing costs and the subsequent depreciation or amortization of those costs versus expensing them in the period incurred vary depending on the type of costs and the reason for capitalizing the costs. Direct costs of a development project generally include construction costs, professional services such as architectural and legal costs, travel expenses, and land acquisition costs as well as other types of fees and expenses. These costs are capitalized as part of the basis of an asset to which such costs relate. Indirect costs include capitalized interest and overhead costs. Indirect costs are capitalized during construction and on the unoccupied space in a property for up to one year after the property is ready for its intended use. Capitalized interest is calculated using the weighted average interest rate of the Company's unsecured debt or the interest rate on project specific debt, if applicable. The 45 Company’s overhead costs are based on overhead load factors that are charged to a project based on direct time incurred. The Company computes the overhead load factors annually for its acquisition and development departments, which have employees who are involved in the projects. The overhead load factors are computed to absorb that portion of indirect employee costs (payroll and benefits, training, and similar costs) that are attributable to the productive time the employee incurs working directly on projects. The employees in the Company’s development departments who work on these projects maintain and report their hours, by project. Employee costs that are administrative, such as vacation time, sick time, or general and administrative time, are expensed in the period incurred. Acquisition-related costs include finder’s fees, advisory, legal, accounting, valuation, other professional or consulting fees, and certain general and administrative costs. Acquisition-related costs are expensed in the period incurred for acquisitions accounted for as a business combination under Accounting Standards Codification Topic 805, Business Combinations . These costs associated with asset acquisitions are capitalized in accordance with GAAP. Management’s judgment is also exercised in determining whether costs that have been previously capitalized to a project should be reserved for or written off if or when the project is abandoned or circumstances otherwise change that would call the project’s viability into question. The Company follows a standard and consistently applied policy of classifying pursuit activity as well as reserving for these types of costs based on their classification. The Company classifies its pursuit projects into two categories relating to development. The first category includes pursuits of developments that have a remote chance of producing new business. Costs for these projects are expensed in the period incurred. The second category includes those pursuits of developments that are either probable or highly probable to result in a project or contract. Since the Company believes it is probable that these pursuits will result in a project or contract, it capitalizes these costs in full and records no reserve. Each quarter, all capitalized pursuit costs are again reviewed for viability or a change in classification, and a management decision is made as to whether any additional reserve is deemed necessary. If necessary and considered appropriate, management would record an additional reserve at that time. Capitalized pursuit costs, net of the reserve, are carried in other assets in the Company’s Consolidated Balance Sheets, and any reserve recorded is charged to acquisition and pursuit costs on the Consolidated Statements of Income. All pursuit costs will ultimately be written off to expense or capitalized as part of the constructed real estate asset. As of December 31, 2022 and 2021, the Company's Consolidated Balance Sheets include capitalized pursuit costs relating to potential developments totaling $4.3 million and $5.1 million respectively. The Company expensed costs related to the pursuit of acquisitions totaling $1.0 million, $2.6 million and $1.0 million for the years ended December 31, 2022, 2021 and 2020, respectively. In addition, the Company expensed costs related to the pursuit of developments totaling $2.2 million, $1.4 million and $1.6 million for the years ended December 31, 2022, 2021 and 2020, respectively. Furthermore, the Company expensed costs related to the Merger totaling $103.4 million for the year ended December 31, 2022. Valuation of Long-Lived Assets Held and Used, Unconsolidated Joint Ventures, Intangible Assets and Goodwill Long-Lived Assets Held and Used The Company assesses the potential for impairment of identifiable intangible assets and long-lived assets, primarily real estate properties, whenever events occur or a change in circumstances indicates that the carrying value might not be recoverable. Important factors that could cause management to review for impairment include significant underperformance of an asset relative to historical or expected operating results; significant changes in the Company's use of assets or the strategy for its overall business; plans to sell an asset before its depreciable life has ended; the expiration of a significant portion of leases in a property; or significant negative economic trends or negative industry trends for the Company or its operators. In addition, the Company reviews for possible impairment of those assets subject to purchase options and those impacted by casualties, such as tornadoes and hurricanes. In addition, at least annually, the Company assesses whether there were indicators, including property operating performance, changes in anticipated holding period and general market conditions, that the value of the Company’s investments, including unconsolidated joint ventures, may have been impaired. The investment’s value would have 46 been impaired only if management’s estimate of the fair value of the Company’s investment was less than its carrying value. To the extent impairment had occurred, a loss would have been recognized for the excess of its carrying amount over its fair value. The Company may, from time to time, be approached by a third party with interest in purchasing one or more of the Company's operating real estate properties that was otherwise not for sale. Alternatively, the Company may explore disposing of an operating real estate property but without specific intent to sell the property and without the property meeting the criteria to be classified as held for sale (see discussion below). In such cases, the Company and a potential buyer typically negotiate a letter of intent followed by a purchase and sale agreement that includes a due diligence time line for completion of customary due diligence procedures. Anytime throughout this period the transaction could be terminated by the parties. The Company views the execution of a purchase and sale agreement as a circumstance that warrants an impairment assessment and must include its best estimates of the impact of a potential sale in the recoverability test discussed in more detail below. A property value is considered impaired only if management's estimate of current and projected (undiscounted and unleveraged) operating cash flows of the property is less than the net carrying value of the property. These estimates of future cash flows include only those that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the property based on its estimated remaining useful life. These estimates, including the useful life determination which can be affected by any potential sale of the property, are based on management's assumptions about its use of the property. Therefore, significant judgment is involved in estimating the current and projected cash flows. When the Company executes a purchase and sale agreement for a held and used property, the Company performs the cash flow estimation described above. This assessment gives consideration to all available information, including an assessment of the likelihood the potential transaction will be consummated under the terms and conditions set forth in the purchase and sale agreement. Management will re-evaluate the recoverability of the property if and when significant changes occur as the transaction proceeds toward closing. Normally sale transactions will close within 15 to 30 days after the due diligence period expires. Upon expiration of the due diligence period, management will again re-evaluate the recoverability of the property, updating its assessment based on the status of the potential sale. Whenever management determines that the carrying value of an asset that has been tested may not be recoverable, then an impairment charge would be recognized to the extent the current carrying value exceeds the current fair value of the asset. Significant judgment is also involved in making a determination of the estimated fair value of the asset. The Company also performs an annual goodwill impairment review. The Company's reviews are performed as of December 31 of each year. The Company's 2022 goodwill asset was $223.2 million after giving effect to the Merger. The 2021 review indicated that no impairment had occurred with respect to the Company's $3.5 million goodwill asset. Long-Lived Assets to be Disposed of by Planned Sale From time to time management affirmatively decides to sell certain real estate properties under a plan of sale. The Company reclassifies the property or disposal group as held for sale when all the following criteria for a qualifying plan of sale are met: • Management, having the authority to approve the action, commits to a plan to sell the property or disposal group; • The property or disposal group is available for immediate sale (i.e., a seller currently has the intent and ability to transfer the property or disposal group to a buyer) in its present condition, subject only to conditions that are usual and customary for sales of such properties or disposal groups; • An active program to locate a buyer and other actions required to complete the plan to sell have been initiated; • The sale of the property or disposal group is probable (i.e., likely to occur) and the transfer is expected to qualify for recognition as a completed sale within one year, with certain exceptions; • The property or disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and 47 • Actions necessary to complete the plan indicate that it is unlikely significant changes to the plan will be made or that the plan will be withdrawn. A property or disposal group classified as held for sale is initially measured at the lower of its carrying amount or fair value less estimated costs to sell. An impairment charge is recognized for any initial adjustment of the property's or disposal group's carrying amount to its fair value less estimated costs to sell in the period the held for sale criteria are met. The fair value less estimated costs to sell the property (disposal group) should be assessed each reporting period it remains classified as held for sale. Depreciation ceases as long as a property is classified as held for sale. If circumstances arise that were previously considered unlikely and a subsequent decision not to sell a property classified as held for sale were to occur, the property is reclassified as held and used. The property is measured at the time of reclassification at the lower of its (a) carrying amount before it was classified as held for sale, adjusted for any depreciation expense or impairment losses that would have been recognized had the property been continuously classified as held and used or (b) fair value at the date of the subsequent decision not to sell. The effect of any required adjustment is reflected in income from continuing operations at the date of the decision not to sell. The Company recorded impairment charges totaling $54.4 million for the year ended December 31, 2022 related to real estate properties and other long-lived assets. The impairment charges related to 12 properties sold and three additional properties associated with completed or planned disposition activity in 2022. The Company recorded impairment charges of $17.1 million in 2021. Valuation of Asset Acquisitions As described in more detail in Note 1 to the Consolidated Financial Statements, when the Company acquires real estate properties with in-place leases, the cost of the acquisition must be allocated between the acquired tangible real estate assets “as if vacant” and any acquired intangible assets. Such intangible assets could include above- (or below-) market in-place leases and at-market in-place leases, which could include the opportunity costs associated with absorption period rentals, direct costs associated with obtaining new leases such as tenant improvements, leasing commissions and customer relationship assets. With regard to the elements of estimating the “as if vacant” values of the property and the intangible assets, including the absorption period, occupancy increases during the absorption period, tenant improvement amounts, and leasing commission percentages, the Company uses the same absorption period and occupancy assumptions for similar property types. Any remaining excess purchase price is then allocated to the tangible and intangible assets based on their relative fair values. The identifiable tangible and intangible assets are then subject to depreciation and amortization. Depreciation of Real Estate Assets and Amortization of Related Intangible Assets As of December 31, 2022, the Company had gross investments of approximately $12.7 billion in depreciable real estate assets and related intangible assets. When real estate assets and related intangible assets are acquired or placed in service, they must be depreciated or amortized. Management’s judgment involves determining which depreciation method to use, estimating the economic life of the building and improvement components of real estate assets, and estimating the value of intangible assets acquired when real estate assets are purchased that have in-place leases. With respect to the building components, there are several depreciation methods available under GAAP. Some methods record relatively more depreciation expense on an asset in the early years of the asset’s economic life, and relatively less depreciation expense on the asset in the later years of its economic life. The straight-line method of depreciating real estate assets is the method the Company follows because, in the opinion of management, it is the method that most accurately and consistently allocates the cost of the asset over its estimated life. The Company assigns a useful life to its owned properties based on many factors, including the age and condition of the property when acquired. 48 Revenue Recognition The Company's primary source of revenue is rental income derived from non-cancelable leases. When a lease is executed, the terms and conditions of the lease are assessed to determine the appropriate accounting classification. As of December 31, 2022, all of the Company's leases, where the Company is the lessor, are classified as operating leases. Operating leases are recognized on the straight-line basis over the term of the related lease, including periods where a tenant is provided a rent concession. Operating expense recoveries, which includes reimbursements for building specific operating expenses, are recognized as revenue in the period in which the related expenses are incurred. The Company generally expects that collectability is probable at lease commencement. If the assessment of collectability changes after the lease commencement date and Rental income is not considered probable, Rental income is recognized on a cash basis and all previously recognized uncollectible Rental income is reversed in the period in which it is determined not to be probable of collection. In addition to the lease-specific collectability assessment performed under Topic 842, the Company may also apply a general reserve ("provision for bad debt"), as a reduction to Rental income, for its portfolio of operating lease receivables. The Company also recognizes certain revenue based on the guidance in Topic 606 and is based on the five-step model to account for revenue arising from contracts with customers. The Company's primary source of revenue associated with Topic 606 relates to parking revenue and management fee income. Derivative Instruments Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the derivative instrument with the recognition of the changes in the fair-value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transaction in a cash flow hedge. The accounting for a derivative requires that the Company make judgments in determining the nature of the derivatives and their effectiveness, including ones regarding the likelihood that a forecasted transaction will take place. These judgments could materially affect our consolidated financial statements. The Company may enter into a derivative instrument to manage interest rate risk from time to time. When a derivative instrument is initiated, the Company will assess its intended use of the derivative instrument and may elect a hedging relationship and apply hedge accounting. As required by the accounting literature, the Company will formally document the hedging relationship for all derivative instruments prior to or contemporaneous with entering into the derivative instrument. 49