What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-08-08 compared with 2023-05-09 · 169 added, 68 removed, 267 unchanged (47% of the section changed)

28 unchanged sentences

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 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.

For a detailed discussion of the Company’s risk factors, please refer to the Company's filings with the SEC, including this report 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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In addition, the equity interests of Legacy HR were contributed by Legacy HTA by means of a contribution and assignment agreement to the OP such that Legacy HR became a wholly-owned subsidiary of the OP.

As a result, Legacy HR became a part of an umbrella partnership REIT (“UPREIT”) structure, which is intended to align the corporate structure of the combined company after giving effect to the Merger and the UPREIT reorganization and to provide a platform for the combined company to more efficiently acquire properties in a tax-deferred manner.

As a result, Legacy HR became a part of an UPREIT structure, which is intended to align the corporate structure of the combined company after giving effect to the Merger and the UPREIT reorganization and to provide a platform for the combined company to more efficiently acquire properties in a tax-deferred manner.

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”.

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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 March 31, 2023, the Company had $1.1 billion available to be drawn on its Unsecured Credit Facility and $49.9 million in cash.

As of June 30, 2023, the Company had $1.1 billion available to be drawn on its Unsecured Credit Facility and $35.9 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 Unsecured Credit Facility.

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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.

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 three months ended March 31, 2023 were approximately $41.6 million.

Cash flows used in investing activities for the six months ended June 30, 2023 were approximately $6.1 million.

Below is a summary of significant investing activities.

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

The following table details the Company's sole acquisition for the six months ended June 30, 2023:

Dollars in thousands ASSOCIATED HEALTH SYSTEM/TENANCY 1

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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.

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:

Subsequent to June 30, 2023, the Company acquired the following property:

Dollars in thousands ASSOCIATED HEALTH SYSTEM/TENANCY 1

DATE ACQUIRED PURCHASE PRICE SQUARE FOOTAGE MILES TO CAMPUS

Colorado Springs, CO UC Health 7/28/23 $ 11,450 42,770 1.30

The Company disposed of seven properties during the six months ended June 30, 2023 for a total sales price of $222.1 million, including cash proceeds of $160.9 million.

The following table details these dispositions for the six months ended June 30, 2023:

Dollars in thousands Date Disposed Sales Price Square Footage

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3/30/23 75,000 147,078

Los Angeles, CA 4

5/12/23 3,300 —

Albany, NY 6/30/23 10,000 40,870

Total dispositions $ 222,110 492,341

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

Capital Funding

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

4 The Company sold a land parcel totaling 0.34 acres.

Subsequent to June 30, 2023, the Company disposed of the following property:

Dollars in thousands DATE DISPOSED SALES PRICE SQUARE FOOTAGE

Houston, TX 8/2/23 $ 8,320 57,170

Capital Expenditures

During the six months ended June 30, 2023, the Company incurred capital expenditures totaling $113.2 million for the following:

• $49.0 million toward the development and redevelopment of properties;

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Financing Activities

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

Cash flows used in financing activities for the six months ended June 30, 2023 were approximately $273.2 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 March 31, 2023, $750.0 million remained available for issuance under our current ATM offering program.

As of June 30, 2023, $750.0 million remained available for issuance under our current ATM offering program.

Debt Activity

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

As of June 30, 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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$ 1,000,000 3.17 %

Subsequent Debt Activity

On August 1, 2023, the Company repaid in full at maturity a mortgage note payable bearing interest at a rate of 3.31% per annum with an outstanding principal of $9.8 million.

The mortgage note encumbered a 66,984 square foot property in Georgia.

Operating Activities

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.

Cash flows provided by operating activities increased from $114.1 million for the six months ended June 30, 2022 to $254.3 million for the six months ended June 30, 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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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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Approximately 76% 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.

The Company typically expects to retain 75% to 90% of tenants upon expiration, and the retention ratio for the first six months of the year was within this range.

Operating Expenses

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

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.

As of June 30, 2023, leases for approximately 92% of the Company's total leased square footage allow for some recovery of operating expenses, with approximately 27% having modified gross lease structures and approximately 65% having net lease structures.

Purchase Options

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YEAR EXERCISABLE NUMBER OF PROPERTIES GROSS REAL ESTATE INVESTMENT AS OF

MARCH 31, 2023 1

JUNE 30, 2023 1

2025 7 112,689

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However, none of these measures represent cash generated from operating activities determined in accordance with GAAP and are not necessarily indicative of cash available to fund cash needs.

Further, these measures should not be considered as an alternative to net income as an indicator of the Company’s operating performance or as an alternative to cash flow from operating activities as a measure of liquidity.

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

THREE MONTHS ENDED MARCH 31,

Further, these measures should not be considered as an

alternative to net income as an indicator of the Company’s operating performance or as an alternative to cash flow from operating activities as a measure of liquidity.

The table below reconciles net income to FFO, Normalized FFO and FAD for the three and six months ended June 30, 2023 and 2022.

THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,

Amounts in thousands, except per share data 2023 2022 2023 2022

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Acquisition and pursuit costs 2

669 1,352 956 2,655

Merger-related costs 3

Merger-related fair value adjustment 10,864 —

(15,670) 7,085 (10,815) 13,201

Merger-related fair value of debt instruments 10,554 — 21,418 —

Lease intangible amortization 240 584 386 893

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Unconsolidated JV normalizing items 5

93 83 210 178

Normalized FFO adjustments $ (3,839) $ 9,244 $ 21,029 $ 18,587

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Non-cash interest amortization 6

1,618 747 2,300 1,458

Rent reserves, net (54) 16 1,317 159

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Unconsolidated JV non-cash items 7

(316) (242) (598) (513)

Normalized FFO adjusted for non-cash items $ 147,818 $ 70,125 $ 298,539 $ 138,445

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3 Includes costs incurred related to the Merger.

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.

For the three and six months ended June 30, 2023, merger costs are net of a refund of $17.8 million for transfer taxes paid during the year ended December 31, 2022.

4 For the six months ended June 30, 2023, 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.

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

Cash NOI and Same Store Cash NOI are key performance indicators.

8 The Company utilizes the treasury stock method which includes the dilutive effect of nonvested share-based awards outstanding of 442,263 and 806,310, respectively, for the three months ended June 30, 2023 and 2022, and the diluted impact of 4,042,993 OP units outstanding for the three and six months ended June 30, 2023.

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

Cash NOI and Merger Combined Same Store Cash NOI are key performance indicators.

Management considers these to be supplemental measures that allow investors, analysts and Company management to measure unlevered property-level operating results.

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Cash NOI is historical and not necessarily indicative of future results.

Same Store Cash NOI compares Cash NOI for stabilized properties.

Merger Combined 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.

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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 Legacy HR same store pool represented approximately 35% of the NOI of the combined company at the time of the Merger.

Management believes that continued reporting of the same store portfolio of only the pre-Merger accounting acquirer (i.e., Legacy HR) offered little value to the investor who was seeking to understand the operating performance and growth potential of the combined company.

The Company was provided access to the underlying financial statements of Legacy HTA (which financial statements had been audited or, in the case of interim periods, reviewed) and other detailed information about each property, such as the acquisition date.

Based on this available information, the Company was able to consistently apply its same store definition across the combined portfolio, resulting in approximately 85% of the combined portfolio being represented in the same store presentation.

The Company utilizes the redevelopment classification for properties where management has approved a change in strategic direction for such properties through the application of additional resources including an amount of capital expenditures significantly above routine maintenance and capital improvement expenditures.

These properties are described in additional detail in Note 6 to the Condensed Consolidated Financial Statements included elsewhere in this report.

Any recently acquired property will be included in the same store pool once the Company has owned the property for eight full quarters.

Newly developed or redeveloped properties will be included in the same store pool eight full quarters after substantial completion.

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

Any recently acquired property will be included in the merger combined same store pool once the Company has owned the property for eight full quarters.

Newly developed or redeveloped properties will be included in the merger combined same store pool eight full quarters after substantial completion.

The following table reflects the Company's Merger Combined Same Store Cash NOI for the six months ended June 30, 2023 and 2022.

NUMBER OF PROPERTIES GROSS INVESTMENT

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

at June 30, 2023 MERGER COMBINED SAME STORE CASH NOI for the six months ended June 30,

Dollars in thousands 2023 2022

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

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,

Merger combined same store properties 594 $ 11,934,872 $ 362,342 $ 353,606

The following tables reconcile net income to Merger Combined Same Store NOI and the merger combined same store property metrics to the total owned real estate portfolio for the six months ended June 30, 2023 and 2022:

Reconciliations of Legacy HR and Merger Combined Same Store Cash NOI

MERGER COMBINED SAME STORE RECONCILIATION

SIX MONTHS ENDED JUNE 30,

Dollars in thousands 2023 2022

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

Net (loss) income attributable to common stockholders $ (169,884) $ 48,357

Other income (expense) 207,225 (21,814)

2 unchanged sentences

Other expenses 1

(4,029) 20,963

Straight-line rent revenue, net (16,251) (2,536)

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Cash NOI not included in same store (54,872) (78,698)

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

Merger combined same store cash NOI $ 362,342 $ 353,606

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.

Includes management fee income, interest, above and below market lease intangible amortization, lease inducement amortization, lease terminations and tenant improvement overage amortization.

Reconciliation of Same Store Properties

AS OF MARCH 31, 2023

LEGACY HR SAME STORE RECONCILIATION

SIX MONTHS ENDED JUNE 30,

Dollars in thousands 2023 2022

Net (loss) income attributable to common stockholders $ (169,884) $ 48,357

Other income (expense) 207,225 (21,814)

General and administrative expense 30,399 21,576

Depreciation and amortization expense 367,671 109,772

Other expenses 1

(4,029) 20,963

Straight-line rent revenue, net (16,251) (2,536)

Joint venture properties 9,726 4,603

Other revenue 2

(7,643) (4,005)

417,214 176,916

Cash NOI not included in same store (261,468) (26,048)

Legacy HR same store cash NOI 3

$ 155,746 $ 150,868

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.

3 Legacy HR same store cash NOI includes 205 properties.

Reconciliation of Merger Combined Same Store Properties

AS OF JUNE 30, 2023

Dollars and square feet in thousands PROPERTY COUNT GROSS INVESTMENT 1

FEET OCCUPANCY

Same store properties 588 $ 11,688,867 34,471 89.0 %

Merger combined same store properties 594 $ 11,934,872 34,824 89.0 %

Acquisitions 62 1,087,583 2,878 87.3 %

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Results of Operations

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:

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

The Company’s results of operations for the three months ended June 30, 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 $189.0 million, or 134.4%, for the three months ended June 30, 2023 compared to the prior year period.

This increase is primarily comprised of the following:

• Acquisitions in 2022 and 2023 contributed $5.1 million.

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• Impact from the Merger contributed $181.2 million.

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:

Interest income increased $2.3 million, or 116.3%, for the three months ended June 30, 2023 compared to the prior year period primarily as a result of notes receivables assumed in the Merger and a note receivable entered into with a buyer upon disposition of a property in the first quarter of 2023.

Other operating income increased $1.5 million, or 54.5%, for the three months ended June 30, 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 $68.4 million, or 120.0%, for the three months ended June 30, 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 $2.2 million.

• Increases in portfolio operating expenses as follows:

◦ Maintenance and repair expense of $1.1 million;

◦ Utilities expense of $0.7 million;

◦ Maintenance and repair of $0.4 million;

◦ Administrative, leasing commissions, and other legal expense of $0.8 million;

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◦ Insurance expense of $0.5 million.

• Property taxes decreased $0.7 million.

• Compensation expense decreased $0.5 million.

• Property taxes decreased $0.1 million.

• Dispositions in 2022 and 2023 resulted in a decrease of $3.1 million.

• Impact from the Merger resulted in an increase of $62.6 million.

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.

General and administrative expenses increased approximately $4.9 million, or 46.7%, for the three months ended June 30, 2023 compared to the prior year period primarily as a result of the following activity:

• Decrease in cash compensation incentive expense of $1.1 million.

• Travel and related expenses increased $0.7 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 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:

• Net increases, primarily due to impacts from the Merger along with professional fees, audit services, insurance and other administrative costs, of $5.3 million.

Merger-related costs decreased $22.8 million, or 321.2%, for the three months ended June 30, 2023 compared to the prior year period primarily due to a reduction in legal and consulting services in connection with the Merger including a refund related to state transfer taxes.

Depreciation and amortization expense increased $127.5 million, or 228.7%, for the three months ended June 30, 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 $2.7 million.

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Gains on sale of real estate properties

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.

In the second quarter of 2023, the Company recognized gains of approximately $7.2 million.

In the second quarter of 2022, the Company recognized gains of approximately $8.5 million.

Interest expense

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

Interest expense increased $49.8 million, or 320.3%, for the three months ended June 30, 2023 compared to the prior year period.

The components of interest expense are as follows:

THREE MONTHS ENDED MARCH 31, CHANGE

THREE MONTHS ENDED JUNE 30, CHANGE

Dollars in thousands 2023 2022 $ %

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Total interest expense $ 65,334 $ 15,543 $ 49,791 320.3 %

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:

Contractual interest expense increased $38.8 million, or 278.3%, for the three months ended June 30, 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 $26.6 million.

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Impairment of Real Estate Properties

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.

In the second quarter of 2023, the Company recognized impairments totaling $55.2 million primarily due to four properties with changes in the expected holding periods.

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.

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

The Company’s results of operations for the six months ended June 30, 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 $374.7 million, or 134.2%, for the six months ended June 30, 2023 compared to the prior year period.

This increase is primarily comprised of the following:

• Acquisitions in 2022 and 2023 contributed $19.3 million.

• Leasing activity, including contractual rent increases, contributed $3.5 million.

• Dispositions in 2022 and 2023 resulted in a decrease of $14.2 million.

• Impact from the Merger contributed $362.2 million.

Interest income increased $4.6 million, or 117.3%, from the prior year period primarily as result of notes receivables assumed in the Merger and a note receivable entered into with a buyer upon disposition of a property in the first quarter of 2023.

Other operating income increased $3.6 million, or 69.7%, from the prior year period primarily as a result of variable parking and asset management fees assumed in the Merger.

Property operating expenses increased $133.0 million, or 116.2%, for the six months ended June 30, 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 $5.8 million.

• Increases in portfolio operating expenses as follows:

◦ Utilities expense of $1.0 million;

◦ Administrative, leasing commissions, and other legal expense of $1.3 million;

◦ Janitorial expense of $0.8 million;

◦ Maintenance and repair expense of $1.2 million;

◦ Insurance expense of $0.8 million.

• Property tax expense decreased of $0.5 million.

• Compensation expense decreased $0.8 million.

• Dispositions in 2022 and 2023 resulted in a decrease of $7.3 million.

• Impact from the Merger resulted in an increase of 126.8 million.

General and administrative expenses increased approximately $8.8 million, or 40.9%, for the six months ended June 30, 2023 compared to the prior year period primarily as a result of the following activity:

• Incentive-based awards decreased $1.5 million.

• Net increases, impacts from the Merger including professional fees, audit services, insurance, travel and other administrative costs, of $10.3 million.

Merger-related costs decreased $24.0 million, or 181.9%, for the six months ended for the six months ended June 30, 2023 primarily due to a reduction in legal and consulting services in connection with the Merger including a refund related to state transfer taxes.

Depreciation and amortization expense increased $257.9 million, or 234.9%, for the six months ended June 30, 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 $7.1 million.

• Various building and tenant improvement expenditures resulted in an increase of $6.5 million.

• Dispositions in 2022 and 2023 resulted in a decrease of $3.6 million.

• Assets that became fully depreciated resulted in a decrease of $6.1 million.

• Impact from the Merger including a reset for fair value resulted in an increase of $254.0 million.

Other Income (Expense)

Gains on sale of real estate properties

Gains on the sale of real estate properties for the six months ended June 30, 2023 and 2022 totaled $8.2 million and $53.3 million, respectively.

Interest expense

Interest expense increased $99.9 million, or 342.0%, for the six months ended June 30, 2023 compared to the prior year period.

The components of interest expense are as follows:

SIX MONTHS ENDED JUNE 30, CHANGE

Dollars in thousands 2023 2022 $ %

Contractual interest $ 103,533 $ 26,452 $ 77,081 291.4 %

Net discount/premium accretion 19,240 129 19,111 14,814.7 %

Debt issuance costs amortization 3,037 1,419 1,618 114.0 %

Amortization of interest rate swap settlement 84 84 — — %

Amortization of treasury hedge settlement 213 213 — — %

Fair value derivative 2,426 — 2,426 — %

Interest cost capitalization (1,282) (145) (1,137) 784.1 %

Interest on lease liabilities 1,841 1,052 789 75.0 %

Total interest expense $ 129,092 $ 29,204 $ 99,888 342.0 %

Contractual interest expense increased $77.1 million, or 291.4%, for the six months ended June 30, 2023 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 $52.4 million.

• New unsecured term loans executed with the amended credit facility accounted for an increase of approximately $19.0 million.

• The Company's Unsecured Term Loan due 2024 and 2026, net of swaps, accounted for an increase of approximately $7.7 million.

• The Unsecured Credit Facility accounted for an increase of approximately $8.1 million due to an increased weighted average balance outstanding and an increase in the weighted average interest rate.

• Interest rate derivatives accounted for a decrease of $10.0 million.

• Mortgage note repayments, net of assumptions, accounted for a decrease of approximately $0.1 million.

Impairment of Real Estate Properties

During the six months ended June 30, 2023, the Company recognized impairments totaling $86.7 million relating to five properties that were sold, one land parcel that was sold, three properties reclassified to held for sale and four additional properties due to changes in the expected holding periods.

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

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