What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-09 compared with 2022-11-09 · 135 added, 252 removed, 200 unchanged (66% of the section changed)

1 unchanged sentence

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.

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 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.

These forward-looking statements are based on the Company'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:

diverting the attention the Company's management from ongoing business operations;

Such risks and uncertainties include, among other things, the following:

failure to realize the expected benefits of the Merger;

significant transaction costs and/or unknown or inestimable liabilities of the Merger;

the risk that Legacy HR's and Legacy HTA’s respective businesses will not be integrated successfully or that such integration may be more difficult, time-consuming or costly than expected;

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 Company, including the uncertainty of expected future financial performance and results of the Company;

the possibility that, if the 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 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 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 Company, including those described from time to time under the caption “Risk Factors” and elsewhere in the Company’s filings and reports with the SEC, including Legacy HR’s and Legacy HTA's Annual Reports on Form 10-K for the year ended December 31, 2021.

increases in interest rates;

the availability and cost of capital at expected rates;

competition for quality assets;

negative developments in the operating results or financial condition of the Company's tenants, including, but not limited to, their ability to pay rent;

the Company's ability to reposition or sell facilities with profitable results;

the Company's ability to release space at similar rates as vacancies occur;

the Company's ability to renew expiring leases;

government regulations affecting tenants' Medicare and Medicaid reimbursement rates and operational requirements;

unanticipated difficulties and/or expenditures relating to future acquisitions and developments;

changes in rules or practices governing the Company's financial reporting;

the Company may be required under purchase options to sell properties and may not be able to reinvest the proceeds from such sales at rates of return equal to the return received on the properties sold;

uninsured or underinsured losses related to casualty or liability;

the incurrence of impairment charges on its real estate properties or other assets;

other legal and operational matters;

and other risks and uncertainties affecting the Company, including those described from time to time under the caption “Risk Factors” and elsewhere in the Company’s filings and reports with the SEC, including the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

Moreover, other risks and uncertainties of which the Company is not currently aware may also affect the Company's forward-looking statements and may cause actual results and the timing of events to differ materially from those anticipated.

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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.

For a detailed discussion of the Company’s risk factors, please refer to the Company's, 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.

For a detailed discussion of the Company’s risk factors, please refer to the Company's filings with the SEC, including this report and Item 1A.

Risk Factors herein and the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Merger with Healthcare Trust of America

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The 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”.

For additional information on the Merger, see Notes 2 and 6 to the Condensed Consolidated Financial Statements.

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 became the historical financial

statements of the Company.

For additional information, please refer to the Explanatory Note in this Quarterly Report on Form 10-Q.

For additional information on the Merger, see Note 2 to the Condensed Consolidated Financial Statements.

Because Legacy HR was the accounting acquirer under GAAP in the transaction, its historical financial statements became the historical financial statements of the Company.

For additional information, please refer to the Explanatory Note in this report.

Liquidity and Capital Resources

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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.

After the refinancing of its bank facilities in connection with the Merger, as of September 30, 2022, the Company had $1.3 billion available to be drawn on its Credit Facility and $57.6 million in cash.

The 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, including the Credit Facility.

After the refinancing of its bank facilities in connection with the Merger, as of March 31, 2023, the Company had $1.1 billion available to be drawn on its Unsecured Credit Facility and $49.9 million in cash.

Management believes that the Company's 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.

Financings in Connection with the Merger

In connection with the effectiveness of the Merger, Legacy HR (in a limited capacity), Legacy HTA and the OP entered into the Credit Facility, which restructures the parties’ existing bank facilities and adds additional borrowing capacities for the Company following the Merger.

Dividends paid by the Company for the three months ended March 31, 2023 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 the timing of interest payments.

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.

Investing Activities

Cash flows provided by investing activities for the nine months ended September 30, 2022 were approximately $1.4 billion.

Cash flows provided by investing activities for the three months ended March 31, 2023 were approximately $41.6 million.

Below is a summary of significant investing activities.

The following table details the Company's acquisitions for the nine months ended September 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

Q1 2022 subtotal 122,175 184,396

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

BayCare Health 6/9/22 18,650 55,788 0.23

Q2 2022 subtotal 163,762 359,706

Seattle, WA EvergreenHealth 8/1/22 4,850 10,593 0.24

Raleigh, NC WakeMed 8/9/22 3,783 11,345 0.24

Jacksonville, FL Ascension 8/9/22 18,195 34,133 0.03

Atlanta, GA Wellstar 8/10/22 11,800 43,496 0.11

Denver, CO Centura 8/11/22 14,800 34,785 2.10

Raleigh, NC Duke 8/18/22 11,375 31,318 0.19

Nashville, TN Ascension 9/15/22 21,000 61,932 0.80

Austin, TX HCA 9/29/22 5,450 15,000 0.03

Q3 2022 subtotal 91,253 242,602

Total real estate acquisitions $ 377,190 786,704

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 September 30, 2022, the Company acquired the following property:

The following table details the Company's sole acquisition for the three months ended March 31, 2023:

Dollars in thousands ASSOCIATED HEALTH SYSTEM/TENANCY 1

DATE ACQUIRED PURCHASE PRICE SQUARE FOOTAGE MILES TO CAMPUS

Jacksonville, FL Ascension 10/12/22 $ 3,600 6,200 0.10

Joint Venture Acquisitions

The following table details the Joint Venture's acquisitions for the nine months ended September 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 joint venture acquisitions $ 100,975 214,124

Tampa, FL BayCare Health 3/10/23 $ 31,500 115,867 0.06

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.

The Company disposed of 30 properties during the nine months ended September 30, 2022 for a total sales price of $892.4 million, including cash proceeds of $866.5 million.

The following table details these dispositions for the nine months ended September 30, 2022:

The Company disposed of six properties during the three months ended March 31, 2023 for a total sales price of $208.8 million, including cash proceeds of $149.2 million.

The following table details these dispositions for the three months ended March 31, 2023:

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

Tampa, FL & Miami, FL 1

1/12/23 $ 93,250 224,037

1/30/23 19,210 36,691

Louis, MO 2/10/23 350 6,500

Los Angeles, CA 3/23/23 21,000 37,165

8/5/22 134,845 283,780

Dallas, TX 4, 6

8/30/22 114,290 189,385

Indianapolis, IN 3

8/31/22 238,845 506,406

Total dispositions $ 892,447 1,991,669

1 Includes two properties.

2 Includes four properties.

3 Includes five properties.

4 Includes six properties.

5 Values and square feet are represented at 100%.

The Company retained a 20% ownership interest in the joint venture that purchased these properties.

6 Values and square feet are represented at 100%.

The Company retained a 40% ownership interest in the joint venture that purchased these properties.

Subsequent to September 30, 2022, the Company disposed of the following properties:

Dollars in thousands DATE DISPOSED SALE PRICE SQUARE FOOTAGE

Dallas, TX 1, 2

10/4/22 $ 104,025 291,328

Houston, TX 2

Los Angeles, CA 3

3/30/23 75,000 147,078

Total dispositions $ 208,810 451,471

1 Includes two properties.

2 These properties were classified as assets held for sale as of September 30, 2022.

1 Includes two properties, sold in two separate transactions to the same buyer on the same date.

2 The Company sold this property to a joint venture in which it retained a 40% interest.

Sales price and square footage reflect the total sales price paid by the joint venture and total square footage of the property.

3 The Company entered into a mortgage note agreement with the buyer for $45 million.

Capital Funding

During the nine months ended September 30, 2022, capital funding included the following:

• $48.6 million toward the following development and redevelopment of properties:

◦ Memphis, Tennessee redevelopment totaled $3.0 million;

◦ Dallas, Texas redevelopments totaled $3.6 million;

◦ Tacoma, Washington redevelopment totaled $6.2 million;

◦ Nashville, Tennessee development totaled $13.6 million;

◦ Orlando, Florida development totaled $1.0 million;

◦ Raleigh, North Carolina development totaled $5.9 million;

◦ Miscellaneous other redevelopment totaled $13.7 million;

◦ tenant improvement funding for previously completed projects totaled $1.6 million.

During the three months ended March 31, 2023, the Company funded $45.9 million toward the following capital expenditures:

• $16.9 million toward the development and redevelopment of properties;

• $11.2 million toward first generation tenant improvements and planned capital expenditures for acquisitions;

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Financing Activities

Cash flows used in financing activities for the nine months ended September 30, 2022 were approximately $1.5 billion.

Cash flows used in financing activities for the three months ended March 31, 2023 were approximately $121.8 million.

See Notes 6 and 9 to the Condensed Consolidated Financial Statements accompanying this report for more information about capital markets and financing activities.

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The Company has equity distribution agreements with various sales agents with respect to our ATM offering program of common stock with an aggregate sales amount of up to $750.0 million.

As of September 30, 2022, $750.0 million remained available for issuance under our current ATM offering program.

As of March 31, 2023, $750.0 million remained available for issuance under our current ATM offering program.

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 an 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.

As of September 30, 2022, the Company had outstanding interest rate derivatives totaling $675.0 million to hedge one-month LIBOR/Term SOFR.

As of March 31, 2023, the Company had outstanding interest rate derivatives totaling $1.0 billion to hedge one-month Term SOFR.

The following details the amount and rate of each swap (dollars in thousands):

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January 15, 2024 $ 200,000 1.21 %

December 16, 2022 75,000 2.37 %

January 15, 2024 1

200,000 1.21 %

May 1, 2026 100,000 2.15 %

100,000 2.15 %

June 1, 2026 150,000 3.83 %

December 1, 2026 150,000 3.84 %

June 1, 2027 150,000 4.13 %

December 1, 2027 250,000 3.79 %

$ 1,000,000 3.17 %

1 Derivatives hedge one-month term SOFR.

Operating Activities

Cash flows provided by operating activities decreased from $170.3 million for the nine months ended September 30, 2021 to $126.7 million for the nine months ended September 30, 2022.

Cash flows provided by operating activities increased from $43.8 million for the three months ended March 31, 2022 to $69.2 million for the three months ended March 31, 2023.

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.

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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

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Rising interest rates and increased volatility in the capital markets have increased the Company’s cost and availability of debt and equity capital.

Limited availability and increases in the cost of capital could adversely impact the Company’s ability to finance operations and acquire and develop properties.

Limited availability and increases in the cost of capital could adversely impact

the Company’s ability to finance operations and acquire and develop properties.

To the extent the Company’s tenants experience increased costs or financing difficulties due to the economic and market conditions, they may be unable or unwilling to make payments or perform their obligations when due.

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The Company expects that approximately 15% of its leases will expire each year in the ordinary course of business.

There are 477 leases totaling 1.3 million square feet that will expire during the fourth quarter of 2022.

Approximately 79% of the leases expiring during the fourth quarter of 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 nine months of the year was within this range.

There are 1,169 leases totaling 3.3 million square feet that will expire during the remainder of 2023.

Approximately 74% of the leases expiring during the remainder of 2023 are for space 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 three months of the year was within this range.

Operating Expenses

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The effects of these operating expense increases are mitigated in leases that have provisions for operating expense reimbursement.

As of September 30, 2022, leases for approximately 91% of the Company's multi-tenant leased square footage allow for some recovery of operating expenses, with approximately 32% having modified gross lease structures and approximately 59% having net lease structures.

General and Administrative Expense

The Company expects annual general and administrative expense synergies of $33 million to $36 million that will be realized within a year from the closing of the Merger.

As of March 31, 2023, leases for approximately 92% of the Company's total leased square footage allow for some recovery of operating expenses, with approximately 28% having modified gross lease structures and approximately 64% having net lease structures.

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):

YEAR EXERCISABLE NUMBER OF PROPERTIES GROSS REAL ESTATE INVESTMENT AS OF

MARCH 31, 2023 1

2025 7 133,068

2026 6 180,186

2027 4 110,129

2028 5 133,803

2029 3 81,784

2031 4 108,767

2032 2 24,613

2033 and thereafter 3

Total 47 $ 1,220,548

1 Includes three properties totaling $44.6 million with stated purchase prices or prices based on fixed capitalization rates.

2 These purchase options have been exercisable for an average of 13.2 years.

3 Includes two medical office buildings that are 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

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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, 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.

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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 nine months ended September 30, 2022 and 2021.

THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,

The table below reconciles net income to FFO, Normalized FFO and FAD for the three months ended March 31, 2023

THREE MONTHS ENDED MARCH 31,

Amounts in thousands, except per share data 2023 2022

Net income (loss) attributable to common stockholders $ 28,304 $ (2,066) $ 76,661 $ 45,052

Net (loss) income attributable to common stockholders $ (87,125) $ 42,227

Net (loss) income attributable to common stockholders per share 1

$ (0.23) $ 0.28

Gain on sales of real estate properties (1,007) (44,784)

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Proportionate share of unconsolidated joint ventures 4,841 2,369

FFO adjustments $ 215,103 $ 13,218

FFO adjustments per common share - diluted 7

$ 0.56 $ 0.09

FFO attributable to common stockholders $ 127,978 $ 55,445

Acquisition and pursuit costs 1

FFO attributable to common stockholders per common share - diluted 7

$ 0.33 $ 0.37

Acquisition and pursuit costs 2

Merger-related costs 3

79,402 — 92,603 —

Merger-related fair value adjustment 10,864 —

Lease intangible amortization 146 309

Non-routine legal costs/forfeited earnest money received — 91

346 — 577 (500)

Allowance for credit losses 4

Debt financing costs — 1,429

Unconsolidated JV normalizing items 5

Normalized FFO adjustments $ 24,868 $ 9,343

Normalized FFO adjustments per common share - diluted 8

$ 0.06 $ 0.06

Normalized FFO attributable to common stockholders $ 152,846 $ 64,788

Normalized FFO attributable to common stockholders per common share - diluted 8

$ 0.40 $ 0.43

Non-real estate depreciation and amortization 604 460

Non-cash interest amortization 6

8,924 720 10,382 2,511

Provision for bad debt, net 457 25 616 3

Rent reserves, net 1,371 143

Straight-line rent, net (8,246) (1,209)

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Unconsolidated JV non-cash items 7

(377) (341) (890) (1,051)

Normalized FFO adjusted for non-cash items $ 150,775 $ 68,321

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FAD $ 125,934 $ 57,035

FFO per common share - diluted $ 0.14 $ 0.42 $ 0.76 $ 1.26

Normalized FFO per common share - diluted $ 0.39 $ 0.43 $ 1.23 $ 1.27

FFO weighted average common shares outstanding - diluted 8

383,335 149,856

1 Potential common shares are not included in the computation of diluted earnings per share when a loss exists as the effect would be an antidilutive per share amount.

2 Acquisition and pursuit costs include third-party and travel costs related to the pursuit of acquisitions and developments.

3 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 $60.6 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 a $5.2 million credit allowance for a mezzanine loan included in "Impairment of real estate and credit loss reserves" on the Statement of Operations and $3.4 million reserve included in “Rental Income” on the Statement of Operations for previously deferred rent and straight line rent for three skilled nursing facilities.

5 Includes the Company's proportionate share of acquisition and pursuit costs related to unconsolidated joint ventures.

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7 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 787,559 and 802,150, respectively, for the three and nine months ended September 30, 2022.

8 The Company utilizes the treasury stock method which includes the dilutive effect of nonvested share-based awards outstanding of 401,937 and 804,415, respectively, for the three months ended March 31, 2023 and 2022, and the diluted impact of 4,042,993 OP units outstanding for the three months ended March 31, 2023.

Cash Net Operating Income ("NOI") and Same Store Cash NOI

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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.

The Company defines Cash NOI as rental income, interest from financing receivables 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.

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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.

Accordingly, stabilized properties exclude properties that were recently acquired or disposed of, properties classified as held for sale or intended 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 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.

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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 proforma same store cash NOI for the three months ended September 30, 2022 and 2021.

The following table reflects the Company's same store cash NOI for the three months ended March 31, 2023 and 2022.

NUMBER OF PROPERTIES GROSS INVESTMENT

at September 30, 2022 SAME STORE CASH NOI for the three months ended September 30,

at March 31, 2023 SAME STORE CASH NOI for the three months ended March 31,

Dollars in thousands 2023 2022

Same store properties 588 $ 11,688,867 $ 178,560 $ 173,649

The following tables reconcile net income to proforma same store NOI and the same store property metrics to the total owned real estate portfolio for the three months ended September 30, 2022 and 2021:

Reconciliation of Proforma Same Store Cash NOI

THREE MONTHS ENDED SEPTEMBER 30,

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 March 31, 2023 and 2022:

Reconciliation of Same Store Cash NOI

THREE MONTHS ENDED MARCH 31,

Dollars in thousands 2023 2022

Net income $ 28,304 $ (2,066)

Non-controlling interests 312 —

Net (loss) income $ (87,125) $ 42,227

Other income (expense) 94,407 (29,293)

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(1,686) (2,044)

Cash NOI 187,621 81,330

209,474 86,739

Pre-Merger Legacy HTA NOI — 127,363

Proforma cash NOI 215,390 206,939

Cash NOI 209,474 214,102

Cash NOI not included in same store (30,914) (40,453)

Proforma same store cash NOI $ 178,828 $ 173,951

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.

Same store cash NOI $ 178,560 $ 173,649

1 Includes acquisition and pursuit costs, Merger-related costs, rent reserves, 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 Proforma Same Store Properties

AS OF SEPTEMBER 30, 2022

Reconciliation of Same Store Properties

AS OF MARCH 31, 2023

Dollars and square feet in thousands PROPERTY COUNT GROSS INVESTMENT 1

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Results of Operations

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

The Company’s results of operations for the three months ended September 30, 2022 compared to the same period in 2021 were impacted by the Merger, acquisitions, developments, dispositions, gains on sale, and capital markets transactions.

Rental income increased $167.2 million, or 126.9%, for the three months ended September 30, 2022 compared to the prior year period.

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

The Company’s results of operations for the three months ended March 31, 2023 compared to the same period in 2022 were impacted by the Merger, acquisitions, developments, dispositions, gains on sale, and capital markets transactions.

Rental income increased $185.6 million, or 134.0%, for the three months ended March 31, 2023 compared to the prior year period.

This increase is comprised of the following:

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• Impact from the Merger contributed $180.2 million.

Interest income increased $1.4 million, or 75.6%, from the prior year period as a result of interest from notes receivables assumed in the Merger.

Other operating income increased $1.1 million, or 36.6%, from the prior year period primarily as a result of variable parking and asset management fees.

Property operating expenses increased $57.0 million, or 102.6%, for the three months ended September 30, 2022 compared to the prior year period primarily as a result of the following activity:

Interest income increased $2.3 million, or 118.3%, for the three months ended March 31, 2023 compared to the prior year period primarily as a result of interest from notes receivables assumed in the Merger.

Other operating income increased $2.1 million, or 86.6%, for the three months ended March 31, 2023 compared to the prior year period primarily as a result of variable parking and asset management fees assumed in the Merger.

Property operating expenses increased $64.6 million, or 112.4%, for the three months ended March 31, 2023 compared to the prior year period primarily as a result of the following activity:

• Acquisitions in 2022 and 2023 resulted in an increase of $3.1 million.

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◦ Janitorial expense of $0.6 million;

◦ Compensation expense of $0.1 million;

◦ Insurance expense of $0.4 million.

• Property taxes decreased $0.7 million.

• Compensation expense decreased $0.5 million.

• Dispositions in 2022 and 2023 resulted in a decrease of $3.8 million.

• Impact from the Merger resulted in an increase of $64.2 million.

General and administrative expenses increased approximately $8.5 million, or 104.0%, for the three months ended September 30, 2022 compared to the prior year period primarily as a result of the following activity:

• Compensation expense increases of $1.4 million, including $1.0 million of non-cash expense.

General and administrative expenses increased approximately $3.9 million, or 35.3%, for the three months ended March 31, 2023 compared to the prior year period primarily as a result of the following activity:

• Compensation expense increases of $0.7 million.

• Travel and related expenses increased $0.8 million.

• Net increases, including professional fees, audit services, insurance and other administrative costs, of $1.6 million.

• Impact from the Merger resulted in an increase of $0.8 million.

Merger-related costs totaled $79.4 million for the three months ended September 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 $107.1 million, or 210.0%, for the three months ended September 30, 2022 compared to the prior year period primarily as a result of the following activity:

Merger-related costs decreased $1.3 million, or 20.6%, for the three months ended March 31, 2023 compared to the prior year period.

These costs consisted primarily of legal and consulting services in connection with the Merger.

Depreciation and amortization expense increased $130.4 million, or 241.4%, for the three months ended March 31, 2023 compared to the prior year period primarily as a result of the following activity:

• Acquisitions in 2022 and 2023 resulted in an increase of $4.4 million.

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Gains on sale of real estate properties

In the third quarter of 2022, the Company recognized gains of approximately $143.9 million.

In the third quarter of 2021, the Company recognized gains of approximately $1.2 million.

In the first quarter of 2023, the Company recognized gains of approximately $1.0 million.

In the first quarter of 2022, the Company recognized gains of approximately $44.8 million.

Interest expense

Interest expense increased $39.7 million, or 297.8%, for the three months ended September 30, 2022 compared to the prior year period.

Interest expense increased $50.1 million, or 366.7%, for the three months ended March 31, 2023 compared to the prior year period.

The components of interest expense are as follows:

THREE MONTHS ENDED SEPTEMBER 30, CHANGE

THREE MONTHS ENDED MARCH 31, CHANGE

Dollars in thousands 2023 2022 $ %

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Net discount/premium accretion 9,591 50 9,541 19,082.0 %

Deferred financing costs amortization 1,341 713 628 88.1 %

Interest rate swap amortization 42 42 — — %

Treasury hedge amortization 107 107 — — %

Debt issuance costs amortization 1,476 711 765 107.6 %

Amortization of interest rate swap settlement 42 42 — — %

Amortization of treasury hedge settlement 107 107 — — %

Fair value derivative 1,429 — 1,429 — %

Interest cost capitalization (570) (38) (532) 1,400.0 %

Right-of-use assets financing amortization 889 255 634 248.6 %

Interest on lease liabilities 918 287 631 219.9 %

Total interest expense $ 63,759 $ 13,661 $ 50,098 366.7 %

Contractual interest expense increased $29.8 million, or 244.4%, for the three months ended September 30, 2022 compared to the prior year period primarily as a result of the following activity:

Contractual interest expense increased $38.3 million, or 306.1%, for the three months ended March 31, 2023 compared to the prior year period primarily as a result of the following activity:

• Senior notes and unsecured term loans assumed in the Merger accounted for an increase of approximately $26.0 million.

• New unsecured term loans executed with the amended credit facility accounted for an increase of approximately $9.0 million.

• The Company's Unsecured Term Loan due 2024 and 2026, net of swaps, accounted for an increase of approximately $1.0 million.

• The Credit Facility accounted for an increase of approximately $4.2 million due to an increased weighted average balance outstanding and an increase in the weighted average interest rate.

• The Company's Unsecured Term Loan due 2024 and 2026 accounted for an increase of approximately $3.9 million.

• The Unsecured Credit Facility accounted for an increase of approximately $4.4 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 $4.8 million.

• Mortgage note repayments, net of assumptions, accounted for a decrease of approximately $0.2 million.

Impairment of Real Estate Properties

In the third quarter of 2021, the Company recognized an impairment of approximately $10.7 million based on the contractual sales price of a property that was reclassified to held for sale during the third quarter of 2021.

In the first quarter of 2023, the Company recognized impairments totaling $26.2 million due to four properties that were sold and three properties and one land parcel reclassified to held for sale.

In addition, the Company recorded $5.2 million in credit loss reserves related to notes receivables.

See Note 1 to the Condensed Consolidated Financial Statements accompanying this report for more details regarding the Company's notes receivables and credit loss reserves.

Equity loss from unconsolidated joint ventures

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See Note 3 to the Condensed Consolidated Financial Statements accompanying this report for more details regarding the Company's unconsolidated joint ventures.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

The Company’s results of operations for the nine months ended September 30, 2022 compared to the same period in 2021 were impacted by the Merger, acquisitions, developments, dispositions, gains on sale, and capital markets transactions.

Rental income increased $189.4 million, or 48.7%, for the nine months ended September 30, 2022 compared to the prior year period.

This increase is comprised of the following:

• Acquisitions in 2021 and 2022 contributed $37.6 million.

• Leasing activity, including contractual rent increases, contributed $11.4 million.

• Dispositions in 2021 and 2022 resulted in a decrease of $14.2 million.

• Impact from the Merger contributed $154.6 million.

Interest income increased $4.8 million, or 199.0%, from the prior year period as the result of two financing receivables acquired during 2021 contributing $3.4 million and interest totaling $1.4 million from notes receivables assumed in the Merger.

Other operating income increased $1.9 million, or 26.2%, from the prior year period primarily as a result of variable parking and asset management fees.

Property operating expenses increased $67.7 million, or 42.5%, for the nine months ended September 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 $15.1 million.

• Increases in portfolio operating expenses as follows:

◦ Utilities expense of $3.2 million;

◦ Administrative, leasing commissions, and other legal expense of $2.1 million;

◦ Janitorial expense of $0.8 million;

◦ Property tax expense increase of $0.6 million;

◦ Compensation expense of $0.6 million;

◦ Maintenance and repair expense of $1.1 million;

◦ Security expense of $0.3 million;

◦ Insurance expense of $0.2 million.

• Dispositions in 2021 and 2022 resulted in a decrease of $7.6 million.

• Impact from the Merger resulted in an increase of $51.3 million.

General and administrative expenses increased approximately $13.1 million, or 51.7%, for the nine months ended September 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 $4.0 million, including $2.4 million of non-cash expense.

• Net increases, including professional fees, audit services, insurance and other administrative costs, of $2.0 million.

• Impact from the Merger resulted in an increase of $5.6 million.

Merger-related costs totaled $92.6 million for the nine months ended September 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 $117.0 million, or 77.5%, for the nine months ended September 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 $19.6 million.

• Various building and tenant improvement expenditures resulted in an increase of $7.6 million.

• Dispositions in 2021 and 2022 resulted in a decrease of $5.3 million.

• Assets that became fully depreciated resulted in a decrease of $7.6 million.

• Impact from the Merger including a reset for fair value resulted in an increase of $102.7 million.

Other Income (Expense)

Gains on sale of real estate properties

Gains on the sale of real estate properties in 2022 totaling approximately $197.2 million.

Gains on the sale of real estate properties in 2021 totaling approximately $41.0 million.

Interest expense

Interest expense increased $42.4 million, or 106.4%, for the nine months ended September 30, 2022 compared to the prior year period.

The components of interest expense are as follows:

NINE MONTHS ENDED SEPTEMBER 30, CHANGE

Dollars in thousands 2022 2021 $ %

Contractual interest $ 68,470 $ 36,590 $ 31,880 87.1 %

Net discount/premium accretion 7,747 146 7,601 5,206.2 %

Deferred financing costs amortization 2,760 2,114 646 30.6 %

Interest rate swap amortization 126 126 — — %

Treasury hedge amortization 320 320 — — %

Fair value derivative 1,732 — 1,732 — %

Interest cost capitalization (848) (187) (661) 353.5 %

Right-of-use assets financing amortization 1,941 748 1,193 159.5 %

Total interest expense $ 82,248 $ 39,857 $ 42,391 106.4 %

Contractual interest expense increased $31.9 million, or 87.1%, for the nine months ended September 30, 2022 compared to the prior year period primarily as a result of the following activity:

• Senior notes and unsecured term loans assumed with the Merger accounted for an increase of approximately $22.8 million.

• New unsecured term loans executed with the amended credit facility accounted for an increase of approximately $2.2 million.

• The Company's Unsecured Term Loan due 2024 and 2026, net of swaps, accounted for an increase of approximately $0.9 million.

• The Unsecured Credit Facility accounted for an increase of approximately $7.0 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 $1.0 million.

Impairment of Real Estate Properties

Impairment of real estate properties in 2021 totaling approximately $16.6 million was associated with the disposal of one property totaling $0.8 million and the reclassification of a property to held for sale resulting in an impairment of $10.7 million based on the contractual sales price.

In addition, the Company recorded impairment charges totaling $5.1 million which includes a property 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, These losses are primarily attributable to non-cash depreciation expense.

See Note 3 to the Condensed Consolidated Financial Statements accompanying this report for more details regarding the Company's unconsolidated joint ventures.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis