Healthcare Realty Trust Inc 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Disclosure Regarding Forward-Looking Statements This report and other materials the Company has filed or may file with the 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. Such risks and uncertainties include, among other things, the following: failure to realize the expected benefits of the Merger; 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; pandemics or other health crises, such as COVID-19; 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. The forward-looking statements made in this communication are made only as of the date hereof or as of the dates indicated in the forward-looking statements, even if they are subsequently made available by the Company on its website or otherwise. The Company undertakes no obligation to update or supplement any forward-looking statements to reflect actual results, new information, future events, changes in its expectations or other circumstances that exist after the date as of which the forward-looking statements were made, except as required by law. Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in the 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Merger with Healthcare Trust of America Completed Merger On July 20, 2022, Legacy HR, Legacy HTA, the OP and Merger Sub completed the Merger in accordance with the terms of the Merger Agreement. Immediately following the Merger, Legacy HR converted to a Maryland limited liability company and changed its name to “HRTI, LLC” and Legacy HTA changed its name to “Healthcare Realty Trust Incorporated”. In addition, the equity interests of Legacy HR were contributed by Legacy HTA by means of a contribution and assignment agreement to the OP such that Legacy HR became a wholly-owned subsidiary of the OP. As a result, Legacy HR became a part of an 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”. 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. 26 Table of Contents Liquidity and Capital Resources Sources and Uses of Cash The Company’s primary sources of cash include rent receipts from its real estate portfolio based on contractual arrangements with its tenants, proceeds from the sales of real estate properties, joint ventures, and proceeds from public or private debt or equity offerings. 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. 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. Investing Activities 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. Acquisitions 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 DATE ACQUIRED PURCHASE PRICE SQUARE FOOTAGE MILES TO CAMPUS 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. 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 Dispositions 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 Tampa, FL & Miami, FL 1 1/12/23 $ 93,250 224,037 Dallas, TX 2 1/30/23 19,210 36,691 St. Louis, MO 2/10/23 350 6,500 Los Angeles, CA 3/23/23 21,000 37,165 Los Angeles, CA 3 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 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. 4 The Company sold a land parcel totaling 0.34 acres. 27 Table of Contents 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; • $21.3 million toward first generation tenant improvements and planned capital expenditures for acquisitions; • $25.6 million toward second generation tenant improvements; and • $17.3 million toward capital expenditures. Financing Activities 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. Common Stock Issuances At-The-Market Equity Offering Program 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 June 30, 2023, $750.0 million remained available for issuance under our current ATM offering program. Debt Activity 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): EXPIRATION DATE AMOUNT WEIGHTED AVERAGE RATE January 15, 2024 $ 200,000 1.21 % May 1, 2026 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 % 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 $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. The Company may, from time to time, sell properties and redeploy cash from property sales into new investments. To the extent revenues related to the properties being sold exceed income from these new investments, the Company's results of operations and cash flows could be adversely affected. 28 Table of Contents Trends and Matters Impacting Operating Results Management monitors factors and trends important to the Company and the REIT industry to gauge the potential impact on the operations of the Company. In addition to the matters discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, below are some of the factors and trends that management believes may impact future operations of the Company. Economic and Market Conditions 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. 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. Additionally, increased interest rates may also result in less liquid property markets, limiting the Company’s ability to sell existing assets or obtain joint venture capital. Expiring Leases The Company expects that approximately 15% of its leases will expire each year in the ordinary course of business. There are 857 leases totaling 2.3 million square feet that will expire during the remainder of 2023. 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 six months of the year was within this range. Operating Expenses The Company historically has experienced increases in property taxes throughout its portfolio as a result of increasing assessments and tax rates levied across the country. The Company continues its efforts to appeal property tax increases and manage the impact of the increases. In addition, the Company historically has incurred variability in portfolio utilities expense based on seasonality, with the first and third quarters usually reflecting greater amounts. The effects of these operating expense increases are mitigated in leases that have provisions for operating expense reimbursement. As of June 30, 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 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 JUNE 30, 2023 1 Current 2 6 $ 112,669 2024 — — 2025 7 112,689 2026 6 181,414 2027 4 110,260 2028 5 133,877 2029 3 81,784 2030 — — 2031 4 108,818 2032 2 24,619 2033 and thereafter 3 10 340,128 Total 47 $ 1,206,258 1 Includes three properties totaling $45.0 million with stated purchase prices or prices based on fixed capitalization rates. 2 These purchase options have been exercisable for an average of 13.4 years. 29 Table of Contents 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 Management considers certain non-GAAP financial measures and key performance indicators to be useful supplemental measures of the Company's operating performance. A non-GAAP financial measure is generally defined as one that purports to measure financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable measure determined in accordance with GAAP. Set forth below are descriptions of the non-GAAP financial measures management considers relevant to the Company's business and useful to investors, as well as reconciliations of these measures to the most directly comparable GAAP financial measures. The non-GAAP financial measures and key performance indicators presented herein are not necessarily identical to those presented by other real estate companies due to the fact that not all real estate companies use the same definitions. These measures should not be considered as alternatives to net income, as indicators of the Company's financial performance, or as alternatives to cash flow from operating activities as measures of the Company's liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of the Company's needs. Management believes that in order to facilitate a clear understanding of the Company's historical consolidated operating results, these measures should be examined in conjunction with net income and cash flows from operations as presented in the Condensed Consolidated Financial Statements and other financial data included elsewhere in this Quarterly Report on Form 10-Q. Funds from Operations ("FFO"), Normalized FFO and Funds Available for Distribution ("FAD") FFO and FFO per share are operating performance measures adopted by the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as the most commonly accepted and reported measure of a REIT’s operating performance equal to “net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization, impairment, and after adjustments for unconsolidated partnerships and joint ventures.” In addition to FFO, the Company presents Normalized FFO and FAD. Normalized FFO is presented by adding to FFO acquisition-related costs, acceleration of debt issuance costs, debt extinguishment costs and other Company-defined normalizing items to evaluate operating performance. FAD is presented by adding to Normalized FFO non-real estate depreciation and amortization, non-cash financing receivable amortization, loan origination cost amortization, deferred financing fees amortization, stock-based compensation expense and rent reserves, net; and subtracting maintenance capital expenditures, including second generation tenant improvements and leasing commissions paid and straight-line rent income, net of expense. The Company's definition of these terms may not be comparable to that of other real estate companies as they may have different methodologies for computing these amounts. FFO, Normalized FFO and FAD should not be considered as an alternative to net income as an indicator of the Company's financial performance or to cash flow from operating activities as an indicator of the Company's liquidity. FFO, Normalized FFO and FAD should be reviewed in connection with GAAP financial measures. Management believes FFO, Normalized FFO, FFO per common share, Normalized FFO per share and FAD ("Non-GAAP Measures") provide an understanding of the operating performance of the Company’s properties without giving effect to certain significant non-cash items, primarily depreciation and amortization expense. Historical cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time. However, real estate values instead have historically risen or fallen with market conditions. The Company believes that by excluding the effect of depreciation, amortization, impairments and gains or losses from sales of real estate, all of which are based on historical costs and which may be of limited relevance in evaluating current performance, Non-GAAP Measures can facilitate comparisons of operating performance between periods. The Company reports Non-GAAP Measures because these measures are observed by management to also be the predominant measures used by the REIT industry and by industry analysts to evaluate REITs. For these reasons, management deems it appropriate to disclose and discuss these Non-GAAP Measures. However, none of these measures represent cash generated from operating activities determined in accordance with GAAP and are not necessarily indicative of cash available to fund cash needs. Further, these measures should not be considered as an 30 Table of Contents 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 Net (loss) income attributable to common stockholders $ (82,759) $ 6,130 $ (169,884) $ 48,357 Net (loss) income attributable to common stockholders per share 1 $ (0.22) $ 0.04 $ (0.45) $ 0.32 Gain on sales of real estate properties (7,156) (8,496) (8,162) (53,280) Impairment of real estate properties 55,215 — 81,442 (25) Real estate depreciation and amortization 185,003 57,334 371,112 112,991 Non-controlling income from operating partnership units (1,027) — (2,094) — Proportionate share of unconsolidated joint ventures 4,412 2,807 9,253 5,176 FFO adjustments $ 236,447 $ 51,645 $ 451,551 $ 64,862 FFO adjustments per common share - diluted 7 $ 0.62 $ 0.34 $ 1.18 $ 0.43 FFO attributable to common stockholders $ 153,688 $ 57,775 $ 281,667 $ 113,219 FFO attributable to common stockholders per common share - diluted 7 $ 0.40 $ 0.38 $ 0.73 $ 0.75 Acquisition and pursuit costs 2 669 1,352 956 2,655 Merger-related costs 3 (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 Non-routine legal costs/forfeited earnest money received 275 140 275 231 Allowance for credit losses 4 — — 8,599 — Debt financing costs — — — 1,429 Unconsolidated JV normalizing items 5 93 83 210 178 Normalized FFO adjustments $ (3,839) $ 9,244 $ 21,029 $ 18,587 Normalized FFO adjustments per common share - diluted 8 $ (0.01) $ 0.06 $ 0.05 $ 0.12 Normalized FFO attributable to common stockholders $ 149,849 $ 67,019 $ 302,696 $ 131,806 Normalized FFO attributable to common stockholders per common share - diluted 8 $ 0.39 $ 0.45 $ 0.79 $ 0.88 Non-real estate depreciation and amortization 802 556 1,406 1,016 Non-cash interest amortization 6 1,618 747 2,300 1,458 Rent reserves, net (54) 16 1,317 159 Straight-line rent, net (8,005) (1,327) (16,251) (2,536) Stock-based compensation 3,924 3,356 7,669 7,055 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 2nd generation TI (17,236) (5,051) (26,118) (9,950) Leasing commissions paid (5,493) (3,475) (12,506) (7,242) Capital additions (8,649) (4,557) (17,595) (7,177) FAD $ 116,440 $ 57,042 $ 242,320 $ 114,076 FFO weighted average common shares outstanding - diluted 8 383,409 150,545 383,372 150,203 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. 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. 31 Table of Contents 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 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 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. 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. The Company also excludes cash lease termination fees. Cash NOI is historical and not necessarily indicative of future results. 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. 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 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. 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 June 30, 2023 MERGER COMBINED SAME STORE CASH NOI for the six months ended June 30, Dollars in thousands 2023 2022 Merger combined same store properties 594 $ 11,934,872 $ 362,342 $ 353,606 32 Table of Contents 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 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 Pre-Merger Legacy HTA NOI — 255,388 Cash NOI 417,214 432,304 Cash NOI not included in same store (54,872) (78,698) Merger combined same store cash NOI $ 362,342 $ 353,606 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. 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. 33 Table of Contents Reconciliation of Merger Combined Same Store Properties AS OF JUNE 30, 2023 Dollars and square feet in thousands PROPERTY COUNT GROSS INVESTMENT 1 SQUARE FEET OCCUPANCY Merger combined same store properties 594 $ 11,934,872 34,824 89.0 % Acquisitions 62 1,087,583 2,878 87.3 % Development completions 4 134,733 266 84.9 % Redevelopments 12 325,247 1,204 55.8 % Planned Dispositions 8 131,187 642 58.9 % Total owned real estate properties 680 $ 13,613,622 39,814 87.4 % 1 Excludes assets held for sale, construction in progress, land held for development, corporate property and financing lease right-of-use assets unrelated to an imputed lease arrangement as a result of a sale leaseback transaction. Results of Operations 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. Revenues 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. • Leasing activity, including contractual rent increases, contributed $5.0 million. • Dispositions in 2022 and 2023 resulted in a decrease of $6.2 million. • Impact from the Merger contributed $181.2 million. 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. Expenses 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; ◦ Administrative, leasing commissions, and other legal expense of $0.8 million; ◦ Janitorial expense of $0.3 million; and ◦ Insurance expense of $0.5 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. 34 Table of Contents 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, 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. • Various building and tenant improvement expenditures resulted in an increase of $3.7 million. • Dispositions in 2022 and 2023 resulted in a decrease of 1.6 million. • Assets that became fully depreciated resulted in a decrease of $3.2 million. • Impact from the Merger resulted in an increase of $125.9 million. Other Income (Expense) Gains on sale of real estate properties 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 $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 JUNE 30, CHANGE Dollars in thousands 2023 2022 $ % Contractual interest $ 52,766 $ 13,950 $ 38,816 278.3 % Net discount/premium accretion 9,649 79 9,570 12,113.9 % Debt issuance costs amortization 1,562 708 854 120.6 % Amortization of interest rate swap settlement 42 42 — — % Amortization of treasury hedge settlement 107 107 — — % Fair value derivative 997 — 997 — % Interest cost capitalization (712) (108) (604) 559.3 % Interest on lease liabilities 923 765 158 20.7 % Total interest expense $ 65,334 $ 15,543 $ 49,791 320.3 % 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. • New unsecured term loans executed with the amended credit facility accounted for an increase of approximately $9.9 million. • The Company's Unsecured Term Loan due 2024 and 2026 accounted for an increase of approximately $3.8 million. • The Unsecured Credit Facility accounted for an increase of approximately $3.8 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 $5.2 million. • Mortgage note repayments, net of assumptions, accounted for a decrease of approximately $0.1 million. 35 Table of Contents Impairment of Real Estate Properties 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 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. 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. Revenues 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. Expenses 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; and ◦ 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. 36 Table of Contents 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. 37 Table of Contents 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.