Healthcare Realty Trust Inc 10-Q

Item 1. Financial Statements Healthcare Realty Trust Incorporated Condensed Consolidated Balance Sheets Amounts in thousands, except per share data ASSETS Unaudited SEPTEMBER 30, 2023 DECEMBER 31, 2022 Real estate properties Land $ 1,387,821 $ 1,439,798 Buildings and improvements 11,004,195 11,332,037 Lease intangibles 890,273 959,998 Personal property 12,686 11,907 Investment in financing receivable, net 120,975 120,236 Financing lease right-of-use assets 82,613 83,824 Construction in progress 85,644 35,560 Land held for development 59,871 74,265 Total real estate properties 13,644,078 14,057,625 Less accumulated depreciation and amortization ( 2,093,952 ) ( 1,645,271 ) Total real estate properties, net 11,550,126 12,412,354 Cash and cash equivalents 24,668 60,961 Assets held for sale, net 57,638 18,893 Operating lease right-of-use assets 323,759 336,983 Investments in unconsolidated joint ventures 325,453 327,248 Goodwill 250,530 223,202 Other assets, net 571,554 469,990 Total assets $ 13,103,728 $ 13,849,631 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Notes and bonds payable $ 5,227,413 $ 5,351,827 Accounts payable and accrued liabilities 204,947 244,033 Liabilities of assets held for sale 3,814 437 Operating lease liabilities 273,319 279,895 Financing lease liabilities 74,087 72,939 Other liabilities 211,365 218,668 Total liabilities 5,994,945 6,167,799 Commitments and contingencies Redeemable non-controlling interests 3,195 2,014 Stockholders' equity Preferred stock, $ .01 par value per share; 200,000 shares authorized; none issued and outstanding — — Class A Common stock, $ .01 par value per share; 1,000,000 shares authorized; 380,860 and 380,590 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively 3,809 3,806 Additional paid-in capital 9,597,629 9,587,637 Accumulated other comprehensive income 17,079 2,140 Cumulative net income attributable to common stockholders 1,069,327 1,307,055 Cumulative dividends ( 3,684,144 ) ( 3,329,562 ) Total stockholders' equity 7,003,700 7,571,076 Non-controlling interest 101,888 108,742 Total equity 7,105,588 7,679,818 Total liabilities and equity $ 13,103,728 $ 13,849,631 The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, are an integral part of these financial statements. 1 Table of Contents Healthcare Realty Trust Incorporated Condensed Consolidated Statements of Operations For the Three and Nine Months Ended September 30, 2023 and 2022 Amounts in thousands, except per share data Unaudited THREE MONTHS ENDED September 30, NINE MONTHS ENDED September 30, 2023 2022 2023 2022 Revenues Rental income $ 333,335 $ 298,931 $ 987,109 $ 578,052 Interest income 4,264 3,366 12,711 7,253 Other operating 4,661 4,057 13,508 9,270 342,260 306,354 1,013,328 594,575 Expenses Property operating 131,639 112,473 379,074 226,947 General and administrative 13,396 16,741 43,796 38,317 Acquisition and pursuit costs 769 482 1,725 3,137 Merger-related costs 7,450 79,402 ( 3,366 ) 92,603 Depreciation and amortization 182,989 158,117 550,661 267,889 336,243 367,215 971,890 628,893 Other income (expense) Gain on sales of real estate properties 48,811 143,908 56,974 197,188 Interest expense ( 66,304 ) ( 53,044 ) ( 195,397 ) ( 82,248 ) Gain (loss) on extinguishment of debt 62 ( 1,091 ) 62 ( 2,520 ) Impairment of real estate properties and credit loss reserves ( 56,873 ) — ( 143,510 ) 25 Equity loss from unconsolidated joint ventures ( 456 ) ( 124 ) ( 1,253 ) ( 776 ) Interest and other income (expense), net 139 ( 172 ) 1,278 ( 378 ) ( 74,621 ) 89,477 ( 281,846 ) 111,291 Net (loss) income $ ( 68,604 ) $ 28,616 $ ( 240,408 ) $ 76,973 Net loss (income) attributable to non-controlling interests 760 ( 312 ) 2,680 ( 312 ) Net (loss) income attributable to common stockholders $ ( 67,844 ) $ 28,304 $ ( 237,728 ) $ 76,661 Basic earnings per common share $ ( 0.18 ) $ 0.08 $ ( 0.63 ) $ 0.36 Diluted earnings per common share $ ( 0.18 ) $ 0.08 $ ( 0.63 ) $ 0.35 Weighted average common shares outstanding - basic 378,925 328,805 378,886 209,807 Weighted average common shares outstanding - diluted 378,925 332,031 378,886 210,944 The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, are an integral part of these financial statements. 2 Table of Contents Healthcare Realty Trust Incorporated Condensed Consolidated Statements of Comprehensive Income For the Three and Nine Months Ended September 30, 2023 and 2022 Amounts in thousands Unaudited THREE MONTHS ENDED September 30, NINE MONTHS ENDED September 30, 2023 2022 2023 2022 Net (loss) income $ ( 68,604 ) $ 28,616 $ ( 240,408 ) $ 76,973 Other comprehensive income Interest rate swaps Reclassification adjustments for (gains) losses included in net income (interest expense) ( 4,168 ) 763 ( 9,874 ) 2,672 Gains arising during the period on interest rate swaps 12,016 6,083 24,999 12,905 7,848 6,846 15,125 15,577 Comprehensive (loss) income ( 60,756 ) 35,462 ( 225,283 ) 92,550 Less: comprehensive loss (income) attributable to non-controlling interests 663 ( 384 ) 2,494 ( 384 ) Comprehensive (loss) income attributable to common stockholders $ ( 60,093 ) $ 35,078 $ ( 222,789 ) $ 92,166 The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, are an integral part of these financial statements. 3 Table of Contents Healthcare Realty Trust Incorporated Condensed Consolidated Statements of Equity and Redeemable Non-Controlling Interests For the Three Months Ended September 30, 2023 and 2022 Amounts in thousands, except per share data Unaudited Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Cumulative Net Income Cumulative Dividends Total Stockholders’ Equity Non-controlling Interests Total Equity Redeemable Non-controlling Interests Balance at June 30, 2023 $ 3,808 $ 9,595,033 $ 9,328 $ 1,137,171 $ ( 3,565,941 ) $ 7,179,399 $ 104,018 $ 7,283,417 $ 2,487 Issuance of common stock, net of issuance costs — 33 — — — 33 — 33 — Common stock redemptions — 8 — — — 8 — 8 — Share-based compensation 1 2,555 — — — 2,556 — 2,556 — Net loss — — — ( 67,844 ) — ( 67,844 ) ( 760 ) ( 68,604 ) — Reclassification adjustments for gains included in net income (interest expense) — — ( 4,118 ) — — ( 4,118 ) ( 50 ) ( 4,168 ) — Gains arising during the period on interest rate swaps — — 11,869 — — 11,869 147 12,016 — Contributions from redeemable non-controlling interests — — — — — — — — 710 Dividends to common stockholders and distributions to non-controlling interest holders ($ 0.31 per share) — — — — ( 118,203 ) ( 118,203 ) ( 1,467 ) ( 119,670 ) — Adjustments to redemption value of redeemable non-controlling interests — — — — — — — — ( 2 ) Balance at September 30, 2023 $ 3,809 $ 9,597,629 $ 17,079 $ 1,069,327 $ ( 3,684,144 ) $ 7,003,700 $ 101,888 $ 7,105,588 $ 3,195 Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Cumulative Net Income Cumulative Dividends Total Stockholders’ Equity Non-controlling Interests Total Equity Redeemable Non-controlling Interests Balance at June 30, 2022 $ 1,516 $ 4,002,525 $ ( 1,250 ) $ 1,314,515 $ ( 3,139,440 ) $ 2,177,866 $ — $ 2,177,866 $ — Issuance of common stock, net of issuance costs — 84 — — — 84 — 84 — Merger consideration transferred 2,289 5,574,174 — — — 5,576,463 110,702 5,687,165 — Non-controlling interests acquired — — — — — — 1,266 1,266 — Common stock redemptions — ( 41 ) — — — ( 41 ) — ( 41 ) — Share-based compensation 1 9,716 — — — 9,717 — 9,717 — Redemption of non-controlling interest — 98 — — — 98 ( 97 ) 1 — Net income — — — 28,304 — 28,304 312 28,616 — Reclassification adjustments for losses included in net income (interest expense) — — 755 — — 755 8 763 — Gains arising during the period on interest rate swaps — — 6,019 — — 6,019 64 6,083 — Dividends to common stockholders and distributions to non-controlling interest holders ($ 0.31 per share) — — — — ( 72,052 ) ( 72,052 ) ( 442 ) ( 72,494 ) — Balance at September 30, 2022 $ 3,806 $ 9,586,556 $ 5,524 $ 1,342,819 $ ( 3,211,492 ) $ 7,727,213 $ 111,813 $ 7,839,026 $ — The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, are an integral part of these financial statements. 4 Table of Contents Healthcare Realty Trust Incorporated Condensed Consolidated Statements of Equity and Redeemable Non-Controlling Interests For the Nine Months Ended September 30, 2023 and 2022 Amounts in thousands, except per share data Unaudited Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Cumulative Net Income Cumulative Dividends Total Stockholders’ Equity Non-controlling Interests Total Equity Redeemable Non-controlling Interests Balance at December 31, 2022 $ 3,806 $ 9,587,637 $ 2,140 $ 1,307,055 $ ( 3,329,562 ) $ 7,571,076 $ 108,742 $ 7,679,818 $ 2,014 Issuance of common stock, net of issuance costs — 112 — — — 112 — 112 — Common stock redemptions — ( 1,587 ) — — — ( 1,587 ) — ( 1,587 ) — Share-based compensation 3 11,467 — — — 11,470 — 11,470 — Net loss — — — ( 237,728 ) — ( 237,728 ) ( 2,680 ) ( 240,408 ) — Reclassification adjustments for gains included in net income (interest expense) — — ( 9,757 ) — — ( 9,757 ) ( 117 ) ( 9,874 ) — Gains arising during the period on interest rate swaps — — 24,696 — — 24,696 303 24,999 — Contributions from redeemable non-controlling interests — — — — — — — — 1,210 Dividends to common stockholders and distributions to non-controlling interest holders ($ 0.93 per share) — — — — ( 354,582 ) ( 354,582 ) ( 4,360 ) ( 358,942 ) — Adjustments to redemption value of redeemable non-controlling interests — — — — — — — — ( 29 ) Balance at September 30, 2023 $ 3,809 $ 9,597,629 $ 17,079 $ 1,069,327 $ ( 3,684,144 ) $ 7,003,700 $ 101,888 $ 7,105,588 $ 3,195 Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Cumulative Net Income Cumulative Dividends Total Stockholders’ Equity Non-controlling Interests Total Equity Redeemable Non-controlling Interests Balance at December 31, 2021 $ 1,505 $ 3,972,917 $ ( 9,981 ) $ 1,266,158 $ ( 3,045,483 ) $ 2,185,116 $ — $ 2,185,116 $ — Issuance of common stock, net of issuance costs 8 22,847 — — — 22,855 — 22,855 — Merger consideration transferred 2,289 5,574,174 — — — 5,576,463 110,702 5,687,165 — Non-controlling interests acquired — — — — — — 1,266 1,266 — Common stock redemptions — ( 248 ) — — — ( 248 ) — ( 248 ) — Share-based compensation 4 16,768 — — — 16,772 — 16,772 — Redemption of non-controlling interest — 98 — — — 98 ( 97 ) 1 — Net income — — — 76,661 — 76,661 312 76,973 — Reclassification adjustments for losses included in net income (interest expense) — — 2,664 — — 2,664 8 2,672 — Gains arising during the period on interest rate swaps — — 12,841 — — 12,841 64 12,905 — Dividends to common stockholders and distributions to non-controlling interest holders ($ 0.93 per share) — — — — ( 166,009 ) ( 166,009 ) ( 442 ) ( 166,451 ) — Balance at September 30, 2022 $ 3,806 $ 9,586,556 $ 5,524 $ 1,342,819 $ ( 3,211,492 ) $ 7,727,213 $ 111,813 $ 7,839,026 $ — The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, are an integral part of these financial statements. 5 Table of Contents Healthcare Realty Trust Incorporated Condensed Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2023 and 2022 Amounts in thousands Unaudited OPERATING ACTIVITIES NINE MONTHS ENDED September 30, 2023 2022 Net (loss) income $ ( 240,408 ) $ 76,973 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 550,661 267,889 Other amortization 33,822 11,875 Share-based compensation 11,470 16,772 Amortization of straight-line rent receivable (lessor) ( 29,320 ) ( 12,267 ) Amortization of straight-line rent on operating leases (lessee) 4,600 2,016 Gain on sales of real estate properties ( 56,974 ) ( 197,188 ) (Gain) loss on extinguishment of debt ( 62 ) 2,520 Impairment of real estate properties and credit loss reserves 143,510 ( 25 ) Equity loss from unconsolidated joint ventures 1,253 776 Distributions from unconsolidated joint ventures 4,366 893 Non-cash interest from financing and notes receivable ( 1,067 ) ( 1,901 ) Changes in operating assets and liabilities: Other assets, including right-of-use-assets ( 34,632 ) ( 19,230 ) Accounts payable and accrued liabilities ( 32,060 ) 35,769 Other liabilities 17,345 ( 58,213 ) Net cash provided by operating activities 372,504 126,659 INVESTING ACTIVITIES Acquisitions of real estate ( 48,106 ) ( 376,924 ) Development of real estate ( 31,318 ) ( 17,572 ) Additional long-lived assets ( 156,871 ) ( 97,797 ) Funding of mortgages and notes receivable ( 14,597 ) ( 3,441 ) Investments in unconsolidated joint ventures ( 3,824 ) ( 99,586 ) Investment in financing receivable ( 310 ) 167 Contributions from redeemable non-controlling interests 710 — Proceeds from sales of real estate properties and additional long-lived assets 366,779 870,806 Proceeds from notes receivable repayments — 500 Cash assumed in Merger, including restricted cash for special dividend payment — 1,149,681 Net cash provided by investing activities 112,463 1,425,834 FINANCING ACTIVITIES Net repayments on unsecured credit facility ( 149,000 ) ( 154,400 ) Borrowings on term loans — 666,500 Repayment on term loan — ( 718,500 ) Repayments of notes and bonds payable ( 11,988 ) ( 18,880 ) Redemption of notes and bonds payable — ( 2,184 ) Dividends paid ( 354,171 ) ( 165,735 ) Special dividend paid in relation to the Merger — ( 1,123,648 ) Net proceeds from issuance of common stock 110 22,851 Common stock redemptions ( 1,834 ) ( 894 ) Distributions to non-controlling interest holders ( 3,836 ) ( 442 ) Debt issuance and assumption costs ( 529 ) ( 12,753 ) Payments made on finance leases ( 12 ) — Net cash used in financing activities ( 521,260 ) ( 1,508,085 ) (Decrease) increase in cash and cash equivalents ( 36,293 ) 44,408 Cash and cash equivalents at beginning of period 60,961 13,175 Cash and cash equivalents at end of period $ 24,668 $ 57,583 6 Table of Contents Supplemental Cash Flow Information NINE MONTHS ENDED September 30, 2023 2022 Interest paid $ 185,402 $ 83,382 Mortgage note receivable taken in connection with sale of real estate $ 45,000 $ — Invoices accrued for construction, tenant improvements and other capitalized costs $ 32,590 $ 52,840 Mortgage note payable assumed in connection with acquisition of real estate, net $ 5,284 $ — Capitalized interest $ 2,077 $ 848 The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, are an integral part of these financial statements. 7 Table of Contents NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies Business Overview Healthcare Realty Trust Incorporated is a real estate investment trust ("REIT") that owns, leases, manages, acquires, finances, develops and redevelops income-producing real estate properties associated primarily with the delivery of outpatient healthcare services throughout the United States. As of September 30, 2023, the Company had gross investments of approximately $ 13.6 billion in 663 wholly-owned real estate properties, construction in progress, redevelopments, financing receivables, financing lease right-of-use assets, land held for development and corporate property. The Company's 663 re al estate properties are located in 35 states and total approxima tely 39.1 million square feet. The Company provided leasing and property management services to approximat ely 38.6 million sq uare feet nationwide. In addition, as of September 30, 2023, the Company had a weighted average ownership interest of approxima tely 44 % in 34 re al estate properties held in joint ventures. See Note 3 below for more details regarding the Company's unconsolidated joint ventures. Any references to square footage or occupancy percentage, and any amounts derived from these values in these notes to the Company's Condensed Consolidated Financial Statements, are outside the scope of our independent registered public accounting firm’s review. Basis of Presentation For purposes of this Quarterly Report on Form 10-Q, references to the “Company” are to Legacy HR for periods prior to the closing of the Merger and thereafter to Legacy HR and Legacy HTA as the combined company after giving effect to the Merger. The Merger is described in more detail in Note 2 to these Condensed Consolidated Financial Statements. The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. However, except as disclosed herein and specific disclosures included as a result of the Merger, management believes there has been no material change in the information disclosed in the Notes to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. All material intercompany transactions and balances have been eliminated in consolidation. This interim financial information should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Management believes that all adjustments of a normal, recurring nature considered necessary for a fair presentation have been included. In addition, the interim financial information does not necessarily represent or indicate what the operating results will be for the year ending December 31, 2023 for many reasons including, but not limited to, acquisitions, dispositions, capital financing transactions, changes in interest rates and the effects of other trends, risks and uncertainties. Principles of Consolidation The Company’s Condensed Consolidated Financial Statements include the accounts of the Company, its wholly owned subsidiaries, and joint ventures and partnerships where the Company controls the operating activities. GAAP requires us to identify entities for which control is achieved through means other than voting rights and to determine which business enterprise is the primary beneficiary of variable interest entities (“VIEs”). Accounting Standards Codification (“ASC”) Topic 810, Consolidation broadly defines a VIE as an entity in which either (i) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of such entity that most significantly impact such entity’s economic performance or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support. The Company identifies the primary beneficiary of a VIE as the enterprise that has both of the following characteristics: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses or receive benefits of the VIE that could potentially be significant to the entity. The Company consolidates its investment in a VIE when it determines that it is the VIE’s primary beneficiary, with any minority interests reflected as non-controlling interests or redeemable non-controlling interests in the accompanying Condensed Consolidated Financial Statements. 8 Table of Contents NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont. The Company may change its original assessment of a VIE upon subsequent events such as the modification of contractual arrangements that affect the characteristics or adequacy of the entity’s equity investments at risk, the disposition of all or a portion of an interest held by the primary beneficiary, or changes in facts and circumstances that impact the power to direct activities of the VIE that most significantly impacts economic performance. The Company performs this analysis on an ongoing basis. For property holding entities not determined to be VIEs, the Company consolidates such entities in which it owns 100 % of the equity or has a controlling financial interest evidenced by ownership of a majority voting interest. All intercompany balances and transactions are eliminated in consolidation. For entities in which the Company owns less than 100 % of the equity interest, the Company consolidates the entity if it has the direct or indirect ability to control the entities’ activities based upon the terms of the respective entities’ ownership agreements. Healthcare Realty Holdings, L.P., a Delaware limited partnership (the "OP"), is 98.8 % owned by the Company. Holders of operating partnership units (“OP Units”) are considered to be non-controlling interest holders in the OP and their ownership interests are reflected as equity on the accompanying Condensed Consolidated Balance Sheets. Further, a portion of the earnings and losses of the OP are allocated to non-controlling interest holders based on their respective ownership percentages. Upon conversion of OP Units to common stock, any difference between the fair value of the common stock issued and the carrying value of the OP Units converted to common stock is recorded as a component of equity. As of September 30, 2023, there were approximately 4.7 million OP Units, or 1.2 % of OP units issued and outstanding, held by non-controlling interest holders. Additionally, the Company is the primary beneficiary of this VIE. Accordingly, the Company consolidates the interests in the OP. As of September 30, 2023, the Company had four consolidated VIEs, in addition to the OP, consisting of joint venture investments in which the Company is the primary beneficiary of the VIE based on the combination of operational control and the rights to receive residual returns or the obligation to absorb losses arising from the joint ventures. Accordingly, such joint ventures have been consolidated, and the table below summarizes the balance sheets of consolidated VIEs, excluding the OP, in the aggregate: (dollars in thousands) SEPTEMBER 30, 2023 Assets: Net real estate investments $ 72,756 Cash and cash equivalents 1,766 Receivables and other assets 2,594 Total assets $ 77,116 Liabilities: Accrued expenses and other liabilities $ 16,909 Total equity 60,207 Total liabilities and equity $ 77,116 As of September 30, 2023, the Company had three unconsolidated VIEs consisting of two notes receivables and one joint venture. The Company does not have the power or economic interests to direct the activities of the VIEs on a stand-alone basis, and therefore it was determined that the Company was not the primary beneficiary. As a result, the Company accounts for the two notes receivables as amortized cost and a joint venture arrangement under the equity method. See below for additional information regarding the Company's unconsolidated VIEs. (dollars in thousands) ORIGINATION DATE LOCATION SOURCE CARRYING AMOUNT MAXIMUM EXPOSURE TO LOSS 2021 Houston, TX 1 Note receivable $ 30,797 $ 31,150 2021 Charlotte, NC 1 Note receivable 5,743 6,000 2022 Texas 2 Joint venture 63,579 63,579 1 Assumed mortgage note receivable in connection with the Merger. 2 Includes investments in seven properties. 9 Table of Contents NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont. As of September 30, 2023, the Company's unconsolidated joint venture arrangements were accounted for using the equity method of accounting as the Company exercised significant influence over but did not control these entities. See Note 3 below for more details regarding the Company's unconsolidated joint ventures. Use of Estimates in the Condensed Consolidated Financial Statements Preparation of the Condensed Consolidated Financial Statements in accordance with GAAP requires management to make estimates and assumptions that affect amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Actual results may differ from those estimates. Reclassifications Certain reclassifications have been made on the Company's prior year Condensed Consolidated Balance Sheet to conform to current year presentation. Previously, the Company's Lease intangibles were included in Building, improvements and lease intangibles and Goodwill was included with Other assets, net. These amounts are now classified as separate line items on the Company's Condensed Consolidated Balance Sheets. Redeemable Non-Controlling Interests The Company accounts for redeemable equity securities in accordance with ASC Topic 480: Accounting for Redeemable Equity Instruments, which requires that equity securities redeemable at the option of the holder, not solely within our control, be classified outside permanent stockholders’ equity. The Company classifies redeemable equity securities as redeemable non-controlling interests in the accompanying Condensed Consolidated Balance Sheets. Accordingly, the Company records the carrying amount at the greater of the initial carrying amount (increased or decreased for the non-controlling interest’s share of net income or loss and distributions) or the redemption value. We measure the redemption value and record an adjustment to the carrying value of the equity securities as a component of redeemable non-controlling interest. As of September 30, 2023, the Company had redeemable non-controlling interests of $ 3.2 million. Asset Impairment The Company assesses the potential for impairment of identifiable, definite-lived, intangible assets and long-lived assets, including real estate properties, whenever the occurrence of an event or a change in circumstances indicates that the carrying value might not be fully recoverable. Indicators of impairment may include significant underperformance of an asset relative to historical or expected operating results; significant changes in the Company’s use of assets or the strategy for its overall business; plans to sell an asset before its depreciable life has ended; the expiration of a significant portion of leases in a property; or significant negative economic trends or negative industry trends for the Company or its tenants. During the three and nine months ended September 30, 2023, the Company recognized real estate impairments totaling $ 56.9 million and $ 138.3 million, respectively, as a result of completed or planned disposition activity. Investments in Leases - Financing Receivables, Net In accordance with ASC Topic 842: Leases, for transactions in which the Company enters into a contract to acquire an asset and leases it back to the seller (i.e., a sale leaseback transaction), control of the asset is not considered to have transferred when the seller-lessee has a purchase option. As a result, the Company does not recognize the underlying real estate asset but instead recognizes a financial asset in accordance with ASC Topic 310: Receivables. See below for additional information regarding the Company's financing receivables. (dollars in thousands) ORIGINATION DATE LOCATION INTEREST RATE CARRYING VALUE as of SEPTEMBER 30, 2023 May 2021 Poway, CA 5.73 % $ 113,634 November 2021 Columbus, OH 6.48 % 7,341 $ 120,975 10 Table of Contents NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont. Real Estate Notes Receivable Real estate notes receivable consists of mezzanine and other real estate loans, which are generally collateralized by a pledge of the borrower’s ownership interest in the respective real estate owner, a mortgage or deed of trust, and/or corporate guarantees. Real estate notes receivable are intended to be held-to-maturity and are recorded at amortized cost, net of unamortized loan origination costs and fees and allowance for credit losses. As of September 30, 2023, real estate notes receivable, net, which are included in Other assets on the Company's Condensed Consolidated Balance Sheets, totaled $ 155.0 million. (dollars in thousands) ORIGINATION MATURITY STATED INTEREST RATE MAXIMUM LOAN COMMITMENT OUTSTANDING as of SEPT 30, 2023 ALLOWANCE FOR CREDIT LOSSES FAIR VALUE DISCOUNT AND FEES CARRYING VALUE as of SEPT 30, 2023 Mezzanine loans Texas 6/24/2021 6/24/2024 8.00 % $ 54,119 $ 54,119 $ ( 5,196 ) $ ( 3,067 ) $ 45,856 Mortgage loans Texas 6/30/2021 12/31/2023 7.00 % 31,150 31,150 — ( 353 ) 30,797 North Carolina 12/22/2021 12/22/2024 8.00 % 6,000 6,000 — ( 257 ) 5,743 Florida 5/17/2022 2/27/2026 6.00 % 65,000 27,651 — ( 49 ) 27,602 California 3/30/2023 3/29/2026 6.00 % 45,000 45,000 — — 45,000 147,150 109,801 — ( 659 ) 109,142 $ 201,269 $ 163,920 $ ( 5,196 ) $ ( 3,726 ) $ 154,998 Allowance for Credit Losses Pursuant to ASC Topic 326, Financial Instruments - Credit Losses, the Company adopted a policy to evaluate current expected credit losses at the inception of loans qualifying for treatment under ASC Topic 326. The Company utilizes a probability of default method approach for estimating current expected credit losses and evaluates the liquidity and creditworthiness of its borrowers on a quarterly basis to determine whether any updates to the future expected losses recognized upon inception are necessary. The Company’s evaluation considers industry and economic conditions, credit enhancements, liquidity, and other factors. In its assessment of current expected credit losses for real estate notes receivable, the Company utilizes past payment history of its borrowers, current economic conditions, and forecasted economic conditions through the maturity date of each note to estimate a probability of default and a resulting loss for each real estate note receivable. During the first quarter of 2023, the Company determined that the risk of credit loss on its mezzanine loans was no longer remote and recorded a credit loss reserve of $ 5.2 million. The following table summarizes the Company's allowance for credit losses on real estate notes receivable: Dollars in thousands NINE MONTHS ENDED SEPTEMBER 30, 2023 TWELVE MONTHS ENDED DECEMBER 31, 2022 Allowance for credit losses, beginning of period $ — $ — Credit loss reserves 5,196 — Allowance for credit losses, end of period $ 5,196 $ — Interest Income Income from Lease Financing Receivables The Company recognized the related income from two financing receivables totaling $ 2.0 million and $ 6.2 million, respectively, for the three and nine months ended September 30, 2023, and $ 2.0 million and $ 5.9 million, respectively for the three and nine months ended September 30, 2022, based on an imputed interest rate over the terms of the applicable lease. As a result, the interest recognized from the financing receivable in any particular period will not equal the cash payments from the lease agreement in that period. Acquisition costs incurred in connection with entering into the financing receivable are treated as loan origination fees. These costs are classified with the financing receivable and are included in the balance of the net investment. Amortization of these amounts will be recognized as a reduction to Interest income over the life of the lease. 11 Table of Contents NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont. Income from Real Estate Notes Receivable During the three and nine months ended September 30, 2023, the Company recognized interest income of $ 2.3 million and $ 6.5 million, respectively, related to real estate notes receivable. The Company recognizes interest income on an accrual basis unless the Company has determined that collectability of contractual amounts is not reasonably assured, at which point the note is placed on non-accrual status and interest income is recognized on a cash basis. As of January 1, 2023, the Company placed two of its real estate notes receivable with principal balances of $ 48.9 million on non-accrual status and accordingly did not recognize any interest income for the three and nine month periods ended September 30, 2023. Revenue from Contracts with Customers (ASC Topic 606) The Company recognizes certain revenue under the core principle of Topic 606. This topic requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Lease revenue is not within the scope of Topic 606. To achieve the core principle, the Company applies the five step model specified in the guidance. Revenue that is accounted for under Topic 606 is segregated on the Company’s Condensed Consolidated Statements of Operations in the Other operating line item. This line item includes parking income, management fee income and other miscellaneous income. Below is a detail of the amounts by category: THREE MONTHS ENDED September 30, NINE MONTHS ENDED September 30, in thousands 2023 2022 2023 2022 Type of Revenue Parking income $ 2,751 $ 2,428 $ 7,511 $ 6,100 Management fee income 1 1,552 1,426 5,122 2,864 Miscellaneous 358 203 875 306 $ 4,661 $ 4,057 $ 13,508 $ 9,270 1 Includes the recovery of certain expenses under the financing receivable as outlined in the management agreement. The Company’s major types of revenue that are accounted for under Topic 606 that are listed above are all accounted for as the performance obligation is satisfied. The performance obligations that are identified for each of these items are satisfied over time, and the Company recognizes revenue monthly based on this principle. Note 2. Merger with HTA On July 20, 2022 (the “Closing Date”), pursuant to the Agreement and Plan of Merger dated as of February 28, 2022 (the “Merger Agreement”), by and among Healthcare Realty Trust Incorporated, a Maryland corporation (now known as HRTI, LLC, a Maryland limited liability company) (“Legacy HR”), Healthcare Trust of America, Inc., a Maryland corporation (now known as Healthcare Realty Trust Incorporated) (“Legacy HTA”), the OP, and HR Acquisition 2, LLC, a Maryland limited liability company (“Merger Sub”), Merger Sub merged with and into Legacy HR, with Legacy HR continuing as the surviving entity and a wholly-owned subsidiary of Legacy HTA (the “Merger”). On the Closing Date, each outstanding share of Legacy HR common stock, $ 0.01 par value per share (the “Legacy HR Common Stock”), was cancelled and converted into the right to receive one share of Legacy HTA class A common stock at a fixed ratio of 1.00 to 1.00. Per the terms of the Merger Agreement, Legacy HTA declared a special dividend of $ 4.82 (the “Special Dividend”) for each outstanding share of Legacy HTA class A common stock, $ 0.01 par value per share ( the “Legacy HTA Common Stock”), and the OP declared a corresponding distribution to the holders of its partnership units, payable to Legacy HTA stockholders and OP unitholders of record on July 19, 2022. 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, and Legacy HR became a wholly-owned subsidiary of the OP. The Company operates under the 12 Table of Contents NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont. 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 under the ticker symbol “HR”. For accounting purposes, the Merger was treated as a “reverse acquisition” in which Legacy HTA was considered the legal acquirer and Legacy HR was considered the accounting acquirer based on various factors, including, but not limited to: (i) the composition of the board of directors of the combined company following the Merger, (ii) the composition of senior management of the combined company following the Merger, and (iii) the premium transferred to the Legacy HTA stockholders. As a result, the historical financial statements of the accounting acquirer, Legacy HR, became the historical financial statements of the Company. The acquisition was accounted for using the acquisition method of accounting in accordance with ASC 805, Business Combinations, which requires, among other things, the assets acquired and the liabilities assumed and non-controlling interests, if any, to be recognized at their acquisition date fair value. The implied consideration transferred on the Closing Date is as follows: Dollars in thousands, except for per share data Shares of Legacy HTA Common Stock outstanding as of July 20, 2022 as adjusted (a) 228,520,990 Exchange ratio 1.00 Implied shares of Legacy HR Common Stock issued 228,520,990 Adjusted closing price of Legacy HR Common Stock on July 20, 2022 (b) $ 24.37 Value of implied Legacy HR Common Stock issued $ 5,569,057 Fair value of Legacy HTA restricted stock awards attributable to pre-Merger services (c) 7,406 Consideration transferred $ 5,576,463 (a) The number of shares of Legacy HTA Common Stock presented above was based on 228,857,717 total shares of Legacy HTA Common Stock outstanding as of the Closing Date, less 192 Legacy HTA fractional shares that were cancelled in lieu of cash and less 336,535 shares of Legacy HTA restricted stock (net of 215,764 shares of Legacy HTA restricted stock withheld). For accounting purposes, these shares were converted to Legacy HR Common Stock, at an exchange ratio of 1.00 share of Legacy HR Common Stock per share of Legacy HTA Common Stock. (b) For accounting purposes, the fair value of Legacy HR Common Stock issued to former holders of Legacy HTA Common Stock was based on the per share closing price of Legacy HR Common Stock on July 20, 2022. (c) Represents the fair value of Legacy HTA restricted shares which fully vested prior to the closing of the Merger or became fully vested as a result of the closing of the Merger and which are attributable to pre-combination services. 13 Table of Contents NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont. Final Purchase Price Allocation The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the Closing Date: Dollars in thousands PRELIMINARY AMOUNTS RECOGNIZED ON THE CLOSING DATE CUMULATIVE MEASUREMENT PERIOD ADJUSTMENTS AMOUNTS RECOGNIZED ON THE CLOSING DATE (as adjusted) ASSETS Real estate investments Land $ 985,926 $ 18,359 $ 1,004,285 Buildings and improvements 6,960,418 ( 119,135 ) 6,841,283 Lease intangible assets (a) 831,920 1,839 833,759 Financing lease right-of-use assets 9,874 3,146 13,020 Construction in progress 10,071 ( 6,744 ) 3,327 Land held for development 46,538 — 46,538 Total real estate investments $ 8,844,747 $ ( 102,535 ) $ 8,742,212 Assets held for sale, net 707,442 ( 7,946 ) 699,496 Investments in unconsolidated joint ventures 67,892 — 67,892 Cash and cash equivalents 26,034 11,403 37,437 Restricted cash 1,123,647 ( 1,247 ) 1,122,400 Operating lease right-of-use assets 198,261 16,370 214,631 Other assets, net (b) (c) 209,163 ( 3,840 ) 205,323 Total assets acquired $ 11,177,186 $ ( 87,795 ) $ 11,089,391 LIABILITIES Notes and bonds payable $ 3,991,300 $ — $ 3,991,300 Accounts payable and accrued liabilities 1,227,570 17,374 1,244,944 Liabilities of assets held for sale 28,677 ( 3,939 ) 24,738 Operating lease liabilities 173,948 10,173 184,121 Financing lease liabilities 10,720 ( 855 ) 9,865 Other liabilities 203,210 ( 8,909 ) 194,301 Total liabilities assumed $ 5,635,425 $ 13,844 $ 5,649,269 Net identifiable assets acquired $ 5,541,761 $ ( 101,639 ) $ 5,440,122 Non-controlling interest $ 110,702 $ — $ 110,702 Goodwill $ 145,404 $ 101,639 $ 247,043 (a) The weighted average amortization period for the acquired lease intangible assets is approximately 6 years. (b) Includes $ 15.9 million of contractual accounts receivable, which approximates fair value. (c) Includes $ 78.7 million of gross contractual real estate notes receivable, the fair value of which was $ 74.8 million, and the Company preliminarily expects to collect substantially all of the real estate notes receivable proceeds as of the Closing Date. The cumulative measurement period adjustments recorded through June 30, 2023 are final and primarily resulted from updated valuations related to the Company’s real estate assets and liabilities and additional information obtained by the Company related to the properties acquired in the Merger and their respective tenants, and resulted in an increase to goodwill of $ 101.6 million. Based on the final purchase price allocation of fair value, approximately $ 247.0 million has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and liabilities assumed. The recognized goodwill is attributable to expected synergies and benefits arising from the Merger, including anticipated general and administrative cost savings and potential economies of scale benefits in both tenant and vendor relationships following the closing of the Merger. None of the goodwill recognized is expected to be deductible for tax purposes. During the third quarter of 2023, the Company experienced a sustained decline in the price per share of its common stock, which it identified as an indicator of goodwill impairment. As a result, the Company performed an interim goodwill evaluation. The fair value of the Company’s single reporting unit 14 Table of Contents NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont. was estimated using a combination of discounted cash flow models and earnings multiples techniques. The quantitative assessment as of September 30, 2023 indicated goodwill was not impaired. Merger-related Costs The Company incurred Merger-related costs of $ 7.5 million and $( 3.4 ) million, respectively, during the three and nine months ended September 30, 2023, which were included within Merger-related costs in results of operations. The Merger-related costs primarily consist of legal, consulting, severance, and banking services and for the nine months ended September 30, 2023 including a refund of $ 17.8 million for transfer taxes paid during the year ended December 31, 2022. Note 3. Real Estate Investments 2023 Acquisition Activity The following table details the Company's real estate acquisition activity for the nine months ended September 30, 2023: Dollars in thousands DATE ACQUIRED PURCHASE PRICE MORTGAGE NOTES PAYABLE, NET CASH CONSIDERATION 1 REAL ESTATE OTHER 2 SQUARE FOOTAGE Tampa, FL 3/10/23 $ 31,500 $ — $ 30,499 $ 30,596 $ ( 97 ) 115,867 Colorado Springs, CO 7/28/23 11,450 ( 5,284 ) 6,024 11,416 ( 108 ) 42,770 Total real estate acquisitions $ 42,950 $ ( 5,284 ) $ 36,523 $ 42,012 $ ( 205 ) 158,637 1 Cash consideration excludes prorations of revenue and expense due to/from seller at the time of the acquisition. 2 Includes other assets acquired, liabilities assumed, and intangibles recognized at acquisition. In the third quarter of 2023, the Company acquired a parcel of land previously under a ground lease for $ 0.8 million and an additional interest in an operating property for $ 0.6 million. Unconsolidated Joint Ventures The Company's investment in and loss recognized for the three and nine months ended September 30, 2023 and 2022 related to its unconsolidated joint ventures accounted for under the equity method are shown in the table below: THREE MONTHS ENDED September 30, NINE MONTHS ENDED September 30, Dollars in thousands 2023 2022 2023 2022 Investments in unconsolidated joint ventures, beginning of period $ 327,245 $ 210,781 $ 327,248 $ 161,942 New investment during the period 1 — 117,880 3,824 167,479 Equity loss recognized during the period ( 456 ) ( 124 ) ( 1,253 ) ( 776 ) Owner distributions ( 1,336 ) ( 785 ) ( 4,366 ) ( 893 ) Investments in unconsolidated joint ventures, end of period $ 325,453 $ 327,752 $ 325,453 $ 327,752 1 In 2023, this was an additional investment in an existing joint venture in which the Company retained a 40 % ownership interest. The investment consisted of the Company's sale of a property in Dallas, Texas to the joint venture. See 2023 Real Estate Asset Dispositions below for additional information. 15 Table of Contents NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont. 2023 Real Estate Asset Dispositions The following table details the Company's dispositions for the nine months ended September 30, 2023: Dollars in thousands DATE DISPOSED SALE PRICE CLOSING ADJUSTMENTS COMPANY-FINANCED MORTGAGE NOTES NET PROCEEDS NET REAL ESTATE INVESTMENT OTHER (INCLUDING RECEIVABLES) 1 GAIN/(IMPAIRMENT) SQUARE FOOTAGE Tampa/Miami, FL 2 1/12/23 $ 93,250 $ ( 5,875 ) $ — $ 87,375 $ 87,302 $ ( 888 ) $ 961 224,037 Dallas, TX 3 1/30/23 19,210 ( 141 ) — 19,069 18,986 43 40 36,691 St. Louis, MO 2/10/23 350 ( 18 ) — 332 398 — ( 66 ) 6,500 Los Angeles, CA 3/23/23 21,000 ( 526 ) — 20,474 20,610 52 ( 188 ) 37,165 Los Angeles, CA 4 3/30/23 75,000 ( 8,079 ) ( 45,000 ) 21,921 88,624 ( 803 ) ( 20,900 ) 147,078 Los Angeles, CA 5 5/12/23 3,300 ( 334 ) — 2,966 3,268 — ( 302 ) — Albany, NY 6/30/23 10,000 ( 1,229 ) — 8,771 2,613 ( 1,040 ) 7,198 40,870 Houston, TX 8/2/23 8,320 ( 285 ) — 8,035 4,567 194 3,274 57,170 Atlanta, GA 8/22/23 25,142 ( 66 ) — 25,076 23,226 ( 536 ) 2,386 55,195 Dallas, TX 9/15/23 115,000 ( 1,504 ) — 113,496 64,183 6,094 43,219 161,264 Houston, TX 9/18/23 250 ( 24 ) — 226 1,998 — ( 1,772 ) 52,040 Chicago, IL 9/27/23 59,950 ( 870 ) — 59,080 74,710 ( 380 ) ( 15,250 ) 104,912 Total dispositions $ 430,772 $ ( 18,951 ) $ ( 45,000 ) $ 366,821 $ 390,485 $ 2,736 $ 18,600 922,922 1 Includes straight-line rent receivables, leasing commissions and lease inducements. 2 Includes two properties, sold in two separate transactions to the same buyer on the same date. 3 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. 4 The Company entered into a mortgage note agreement with the buyer for $ 45 million. 5 The Company sold a land parcel totaling 0.34 acres. Assets Held for Sale The Company had 17 properties and one corporate entity classified as assets held for sale as of September 30, 2023. The net real estate assets held for sale includes the impact of $ 15.9 million and $ 46.4 million, respectively, of impairment charges for the three and nine months ended September 30, 2023. The Company had one property classified as assets held for sale as of December 31, 2022, which was sold in the first quarter of 2023. The table below reflects the assets and liabilities classified as held for sale as of September 30, 2023 and December 31, 2022: Dollars in thousands September 30, 2023 December 31, 2022 Balance Sheet data: Land $ 14,282 $ 1,700 Building and improvements 41,538 15,164 Lease intangibles 12,938 1,986 68,758 18,850 Accumulated depreciation ( 13,634 ) — Real estate assets held for sale, net 55,124 18,850 Operating lease right-of-use assets 585 — Other assets, net 1,929 43 Assets held for sale, net $ 57,638 $ 18,893 Accounts payable and accrued liabilities $ 1,716 $ 282 Operating lease liabilities 1,020 — Other liabilities 1,078 155 Liabilities of assets held for sale $ 3,814 $ 437 16 Table of Contents NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont. Note 4. Leases Lessor Accounting The Company’s properties generally are leased pursuant to non-cancelable, fixed-term operating leases with expiration dates through 2052. Some leases provide tenants with fixed rent renewal terms while others have market rent renewal terms. Some leases provide the lessee, during the term of the lease, with an option or right of first refusal to purchase the leased property. The Company’s single-tenant net leases generally require the lessee to pay minimum rent and all taxes (including property tax), insurance, maintenance and other operating costs associated with the leased property. The Company's leases typically have escalators that are either based on a stated percentage or an index such as the consumer price index ("CPI"). In addition, most of the Company's leases include nonlease components, such as reimbursement of operating expenses as additional rent, or include the reimbursement of expected operating expenses as part of the lease payment. The Company adopted an accounting policy to combine lease and nonlease components. Rent escalators based on indices and reimbursements of operating expenses that are not included in the lease rate are considered variable lease payments. Variable payments are recognized in the period earned. Lease income for the Company's operating leases recognized for the three and nine months ended September 30, 2023 was $ 333.3 million and $ 987.1 million, respectively. Lease income for the Company's operating leases recognized for the three and nine months ended September 30, 2022 was $ 298.9 million and $ 578.1 million, respectively. Future lease payments under the non-cancelable operating leases, excluding any reimbursements and one sale-type lease, as of September 30, 2023 were as follows: Dollars in thousands OPERATING 2023 $ 231,698 2024 874,750 2025 770,520 2026 666,294 2027 552,111 2028 and thereafter 1,918,689 $ 5,014,062 Lessee Accounting As of September 30, 2023, the Company was obligated, as the lessee, under operating lease agreements consisting primarily of the Company’s ground leases. As of September 30, 2023, the Company had 240 properties totaling 17.4 million square feet that were held under ground leases. Some of the ground lease renewal terms are based on fixed rent renewal terms and others have market rent renewal terms. These ground leases typically have initial terms of 40 to 99 years with expiration dates through 2119. Any rental increases related to the Company’s ground leases are generally either stated or based on CPI. The Company had 75 prepaid ground leases as of September 30, 2023. The amortization of the prepaid rent, included in the operating lease right-of-use asset, represented approximately $ 0.3 million and $ 0.1 million of the Company’s rental expense for the three months ended September 30, 2023 and 2022, respectively, and $ 1.0 million and $ 0.4 million for the nine months ended September 30, 2023 and 2022, respectively. 17 Table of Contents NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont. The Company’s future lease payments (primarily for its 165 non-prepaid ground leases) as of September 30, 2023 were as follows: Dollars in thousands OPERATING FINANCING 2023 $ 3,288 $ 513 2024 14,062 2,182 2025 14,253 2,218 2026 14,392 2,255 2027 14,630 2,294 2028 and thereafter 922,019 396,397 Total undiscounted lease payments 982,644 405,859 Discount ( 709,325 ) ( 331,772 ) Lease liabilities $ 273,319 $ 74,087 The following table provides details of the Company's total lease expense for the three and nine months ended September 30, 2023 and 2022: THREE MONTHS ENDED September 30, NINE MONTHS ENDED September 30, Dollars in thousands 2023 2022 2023 2022 Operating lease cost Operating lease expense $ 5,312 $ 4,204 $ 15,748 $ 6,613 Variable lease expense 2,417 1,061 6,788 3,123 Finance lease cost Amortization of right-of-use assets 387 381 1,161 884 Interest on lease liabilities 928 861 2,770 1,913 Total lease expense $ 9,044 $ 6,507 $ 26,467 $ 12,533 Other information Operating cash flows outflows related to operating leases $ 5,281 $ 3,847 $ 16,475 $ 8,443 Operating cash flows outflows related to financing leases $ 524 $ 476 $ 1,592 $ 1,262 Financing cash flows outflows related to financing leases $ 7 $ 3 $ 12 $ 3 Right-of-use assets obtained in exchange for new finance lease liabilities $ — $ 9,874 $ — $ 50,463 Right-of-use assets obtained in exchange for new operating lease liabilities $ — $ 198,261 $ — $ 198,261 Weighted-average years remaining lease term (excluding renewal options) - operating leases 47.5 50.2 Weighted-average years remaining lease term (excluding renewal options) - finance leases 58.2 60.1 Weighted-average discount rate - operating leases 5.8 % 5.7 % Weighted-average discount rate - finance leases 5.0 % 5.0 % 18 Table of Contents NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont. Note 5. Notes and Bonds Payable The table below details the Company’s notes and bonds payable as of September 30, 2023 and December 31, 2022. MATURITY DATES BALANCE 1 AS OF EFFECTIVE INTEREST RATE as of 9/30/2023 Dollars in thousands 9/30/2023 12/31/2022 $ 1.5 billion Unsecured Credit Facility 10/25 $ 236,000 $ 385,000 6.24 % $ 200 million Unsecured Term Loan 5/24 199,845 199,670 6.30 % $ 350 million Unsecured Term Loan 2 7/24 349,711 349,114 6.30 % $ 300 million Unsecured Term Loan 10/25 299,952 299,936 6.30 % $ 150 million Unsecured Term Loan 6/26 149,606 149,495 6.30 % $ 200 million Unsecured Term Loan 7/27 199,467 199,362 6.30 % $ 300 million Unsecured Term Loan 1/28 298,184 297,869 6.30 % Senior Notes due 2025 5/25 249,391 249,115 4.12 % Senior Notes due 2026 8/26 577,124 571,587 4.94 % Senior Notes due 2027 7/27 482,665 479,553 4.76 % Senior Notes due 2028 1/28 297,283 296,852 3.85 % Senior Notes due 2030 2/30 572,883 565,402 5.30 % Senior Notes due 2030 3/30 296,679 296,385 2.72 % Senior Notes due 2031 3/31 295,706 295,547 2.25 % Senior Notes due 2031 3/31 645,232 632,693 5.13 % Mortgage notes payable 12/23-12/26 77,685 84,247 3.57 %- 6.88 % $ 5,227,413 $ 5,351,827 . 1 Balance is presented net of discounts and issuance costs and inclusive of premiums, where applicable. 2 On April 26, 2023, the Company exercised its option to extend the maturity date for one year for a fee of approximately $ 0.4 million. Changes in Mortgage Notes Payable On July 28, 2023, the Company assumed a mortgage note payable of $ 5.6 million in connection with the acquisition of a 42,770 square foot property in Colorado Springs, Colorado. The note bears interest at a rate of 4.5 % per annum and matures on April 1, 2026. 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 Marietta, Georgia. Note 6. Derivative Financial Instruments Risk Management Objective of Using Derivatives The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings. Cash Flow Hedges of Interest Rate Risk The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the 19 Table of Contents NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont. life of the agreements without exchange of the underlying notional amount. Such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. For derivatives designated, and that qualify, as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income (Loss) ("AOCI") and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. As of September 30, 2023, the Company had 14 outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk: 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 Activity On October 19, 2023, the Company entered into two swap transactions totaling $ 100.0 million. The notional amounts were $ 50.0 million each with fixed rates of 4.71 % and 4.67 %. The swap agreements have effective dates of November 1, 2023 and termination dates of June 1, 2027 and December 1, 2027, respectively. On October 23, 2023, the Company entered into two swap transactions totaling $ 100.0 million with an aggregate fixed rate of 4.73 %. The swap agreements have effective dates of November 1, 2023 and termination dates of May 31, 2026. Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet The table below presents the fair value of the Company's derivative financial instruments, as well as their classification on the Condensed Consolidated Balance Sheet as of September 30, 2023. BALANCE AT SEPTEMBER 30, 2023 In thousands BALANCE SHEET LOCATION FAIR VALUE Derivatives designated as hedging instruments Interest rate swaps Other assets $ 21,499 20 Table of Contents NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont. Tabular Disclosure of the Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income (Loss) The table below presents the effect of cash flow hedge accounting on AOCI during the three and nine months ended September 30, 2023 and 2022 related to the Company's outstanding interest rate swaps. (GAIN)/LOSS RECOGNIZED IN AOCI ON DERIVATIVE three months ended September 30, (GAIN)/LOSS RECLASSIFIED FROM AOCI INTO INCOME three months ended September 30, In thousands 2023 2022 2023 2022 Interest rate swaps $ ( 12,016 ) $ ( 6,083 ) Interest expense $ ( 4,317 ) $ 614 Settled treasury hedges — — Interest expense 107 107 Settled interest rate swaps — — Interest expense 42 42 $ ( 12,016 ) $ ( 6,083 ) Total interest expense $ ( 4,168 ) $ 763 (GAIN)/LOSS RECOGNIZED IN AOCI ON DERIVATIVE nine months ended September 30, (GAIN)/LOSS RECLASSIFIED FROM AOCI INTO INCOME nine months ended September 30, In thousands 2023 2022 2023 2022 Interest rate swaps $ ( 24,999 ) $ ( 12,905 ) Interest expense $ ( 10,320 ) $ 2,226 Settled treasury hedges — — Interest expense 126 320 Settled interest rate swaps — — Interest expense 320 126 $ ( 24,999 ) $ ( 12,905 ) Total interest expense $ ( 9,874 ) $ 2,672 The Company estimates that an additional $ 14.1 million related to active interest rate swaps will be reclassified from AOCI as a decrease to interest expense over the next 12 months, and that an additional $ 0.6 million related to settled interest rate swaps will be amortized from AOCI as an increase to interest expense over the next 12 months. Credit-risk-related Contingent Features The Company's agreements with each of its derivative counterparties contain a cross-default provision under which the Company could be declared in default of its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on the indebtedness. As of September 30, 2023, the fair value of derivatives in a net asset position including accrued interest but excluding any adjustment for nonperformance risk related to these agreements was $ 21.5 million. As of September 30, 2023, the Company had not posted any collateral related to these agreements and was not in breach of any agreement. Note 7. Commitments and Contingencies Legal Proceedings The Company is, from time to time, involved in litigation arising in the ordinary course of business. The Company is not aware of any pending or threatened litigation that, if resolved against the Company, would have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. Development and Redevelopment Activity For the nine months ended September 30, 2023, the Company invested $ 55.3 million and $ 15.4 million toward active development and redevelopment of properties, respectively, and $ 9.2 million toward recently completed development and redevelopment projects. In the second quarter of 2023, the Company entered into a joint venture agreement for the development of a medical office building in Scottsdale, Arizona. The Company holds a 90 % interest in the joint venture and determined the arrangement meets the criteria to be consolidated. The joint venture acquired an $ 8.8 million land parcel to be developed with the Company contributing cash of $ 8.3 million. This is included in the Company's investment toward active development properties for the nine months ended September 30, 2023. 21 Table of Contents NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont. Note 8. Stockholders' Equity Common Stock The following table provides a reconciliation of the beginning and ending shares of common stock outstanding for the nine months ended September 30, 2023 and the twelve months ended December 31, 2022: NINE MONTHS ENDED SEPTEMBER 30, 2023 TWELVE MONTHS ENDED DECEMBER 31, 2022 Balance, beginning of period 380,589,894 150,457,433 Issuance of common stock 7,397 229,618,304 Non-vested share-based awards, net of withheld shares 262,821 514,157 Balance, end of period 380,860,112 380,589,894 At-The-Market Equity Offering Program The Company has equity distribution agreements with various sales agents with respect to the at-the-market (“ATM”) equity offering program of common stock with an aggregate sales amount of up to $ 750.0 million. As of September 30, 2023, $ 750.0 million remained available for issuance under our current ATM equity offering program. During the nine months ended September 30, 2023, the Company did not sell any shares or enter into any forward sale agreements to sell shares of common stock through its ATM equity offering program. Common Stock Dividends During the nine months ended September 30, 2023, the Company declared and paid common stock dividends totaling $ 0.93 per share. On October 30, 2023, the Company declared a quarterly common stock dividend in the amount of $ 0.31 per share payable on November 30, 2023 to stockholders of record on November 14, 2023. Earnings Per Common Share The Company uses the two-class method of computing net earnings per common shares. The Company's non-vested share-based awards are considered participating securities pursuant to the two-class method. The following table sets forth the computation of basic and diluted earnings per common share for the three and nine months ended September 30, 2023 and 2022. THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, Dollars in thousands, except per share data 2023 2022 2023 2022 Weighted average common shares outstanding Weighted average common shares outstanding 380,857,560 330,788,997 380,828,004 211,740,767 Non-vested shares ( 1,932,221 ) ( 1,983,742 ) ( 1,941,897 ) ( 1,933,957 ) Weighted average common shares outstanding - basic 378,925,339 328,805,255 378,886,107 209,806,810 Weighted average common shares outstanding - basic 378,925,339 328,805,255 378,886,107 209,806,810 Dilutive effect of forward equity shares — — — — Dilutive effect of OP Units — 3,167,668 — 1,067,493 Dilutive effect of employee stock purchase plan — 58,461 — 69,687 Weighted average common shares outstanding - diluted 378,925,339 332,031,384 378,886,107 210,943,990 Net (loss) income $ ( 68,604 ) $ 28,616 $ ( 240,408 ) $ 76,973 Income allocated to participating securities ( 636 ) ( 610 ) ( 1,868 ) ( 1,817 ) Loss (income) attributable to non-controlling interest 760 ( 312 ) 2,680 ( 312 ) Adjustment to loss attributable to non-controlling interest for legally outstanding restricted units ( 29 ) — ( 122 ) — Net (loss) income applicable to common stockholders - basic $ ( 68,509 ) $ 27,694 $ ( 239,718 ) $ 74,844 Basic earnings per common share - net income $ ( 0.18 ) $ 0.08 $ ( 0.63 ) $ 0.36 Diluted earnings per common share - net income $ ( 0.18 ) $ 0.08 $ ( 0.63 ) $ 0.35 The effect of OP units totaling 4,042,993 shares and options under the Company's Employee Stock Purchase Plan (the "ESPP") to purchase the Company's common stock totaling 26,678 shares for the three months ended September 30, 22 Table of Contents NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont. 2023 were excluded from the calculation of diluted loss per common share because the effect was anti-dilutive due to the loss from continuing operations incurred during that period. Incentive Plans Equity Awards During the nine months ended September 30, 2023, the Company made the following equity awards: • During the first quarter of 2023, the Company granted non-vested stock awards to its named executive officers and other members of senior management and employees with a grant date fair value of $ 5.4 million, which consisted of an aggregate of 270,494 non-vested shares with vesting periods ranging from three to eight years . • During the second quarter of 2023, the Company granted to its 12 independent directors an aggregate of 42,768 shares of non-vested stock awards with a grant date fair value of $ 0.7 million, and an aggregate of 57,868 LTIP Series D units with a grant date fair value of $ 1.1 million. The Company also granted a non-vested stock award to a new employee, which consisted of 508 non-vested shares. A summary of the activity under the Company's share-based incentive plans for the three and nine months ended September 30, 2023 and 2022 is included in the table below. THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 2023 2022 2023 2022 Share-based awards, beginning of period 1,932,221 1,941,709 1,795,128 1,562,028 Granted — 71,852 313,770 513,876 Vested — ( 7,434 ) ( 152,314 ) ( 68,481 ) Forfeited — ( 4,130 ) ( 24,363 ) ( 5,426 ) Share-based awards, end of period 1,932,221 2,001,997 1,932,221 2,001,997 During the nine months ended September 30, 2023 and 2022, the Company withheld 38,632 and 8,745 shares of common stock, respectively, from participants to pay estimated withholding taxes related to shares that vested. Restricted Stock Units Prior to 2022, the Company granted long-term incentive awards, comprised of restricted stock, based on backward-looking performance measured at the end of the calendar year. The Company adopted a new incentive compensation structure effective January 2022, comprised of restricted stock and restricted stock units ("RSUs"). The RSUs are granted at the beginning of the year with three-year forward-looking performance targets. On January 4, 2023, the Company granted RSUs to members of senior management, with a grant date fair value of $ 3.7 million, which consisted of an aggregate 165,174 RSUs with a five-year vesting period. Approximately 43 % of the RSUs vest based on two market performance conditions. Relative and absolute total shareholder return ("TSR") awards containing these market performance conditions were valued using independent specialists. The Company utilized a Monte Carlo simulation to calculate the weighted average grant date fair values of $ 24.23 for the absolute TSR component and $ 27.84 for the relative TSR component for the January 2023 grant using the following assumptions: THREE MONTHS ENDED MARCH 31, Volatility 34.0 % Dividend assumption Accrued Expected term 3 years Risk-free rate 4.42 % Stock price (per share) $ 20.21 The remaining 57 % of the RSUs vest based upon certain operating performance conditions. With respect to the operating performance conditions of the January 4, 2023 grant, the grant date fair value was $ 20.21 based on the Company's share price on the date of grant. The combined weighted average grant date fair value of the January RSUs was $ 22.55 per share. 23 Table of Contents NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont. The following is a summary of the RSU activity during the three and nine months ended September 30, 2023: THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, Restricted Stock Units Weighted Average Grant Date Fair Value Restricted Stock Units Weighted Average Grant Date Fair Value Non-vested, beginning of period 363,250 $ 28.57 294,932 $ 33.04 Granted — — 165,174 22.55 Vested/Forfeited — — ( 17,606 ) 33.04 Probability adjustment of 2022 & 2023 RSUs ( 47,196 ) 20.21 ( 126,446 ) 27.40 Non-vested, end of period 316,054 $ 27.77 316,054 $ 27.77 LTIP Series C Units In January 2023, the Company modified its incentive compensation structure to award LTIP Series C units ("LTIP-C units) in the OP to named executive officers in lieu of RSUs. The LTIP-C units were granted with three-year forward-looking performance targets, with a grant date fair value of $ 7.1 million, which consisted of an aggregate 448,249 LTIP-C units with a five-year vesting period. Approximately 43 % of the LTIP-C units vest based on two market performance conditions. Relative and absolute TSR awards containing these market performance conditions were valued using independent specialists. The Company utilized a Monte Carlo simulation to calculate the weighted average grant date fair values of $ 12.24 for the absolute TSR component and $ 13.98 for the relative TSR component for the January 2023 grant using the following assumption: THREE MONTHS ENDED MARCH 31, Volatility 34.0 % Dividend assumption Accrued Expected term 3 years Risk-free rate 4.42 % Stock price (per share) $ 20.21 The remaining 57 % of the LTIP-C units vest based upon certain operating performance conditions. With respect to the operating performance conditions of the January 4, 2023 grant, the grant date fair value was $ 20.21 based on the Company's share price on the date of grant. The combined weighted average grant date fair value of the January LTIP-C units was $ 15.85 per share. The Company records amortization expense based on the probability of achieving certain operating performance conditions, which is evaluated throughout the performance period. Employee Stock Purchase Plan Legacy HR maintained an ESPP prior to the completion of the Merger. The outstanding options to purchase shares of the common stock of Legacy HR became options to purchase class A common stock of the Company upon completion of the Merger. No new options will be granted under the ESPP. A summary of the activity under the ESPP for the three and nine months ended September 30, 2023 and 2022 is included in the table below. THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 2023 2022 2023 2022 Outstanding and exercisable, beginning of period 179,369 405,534 340,976 348,514 Granted — — — 255,960 Exercised ( 2,580 ) ( 4,576 ) ( 7,397 ) ( 17,094 ) Forfeited ( 4,680 ) ( 37,628 ) ( 28,471 ) ( 83,417 ) Expired — — ( 132,999 ) ( 140,633 ) Outstanding and exercisable, end of period 172,109 363,330 172,109 363,330 24 Table of Contents NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont. The following table represents expected amortization of the Company's non-vested shares issued as of September 30, 2023: Dollars in millions FUTURE AMORTIZATION of non-vested shares 2023 $ 4.1 2024 13.3 2025 10.8 2026 8.0 2027 2.4 2028 and thereafter 0.5 Total $ 39.1 Note 9. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practical to estimate that value. • Cash and cash equivalents - The carrying amount approximates fair value (level 1 inputs) due to the short term maturity of these investments. • Real estate notes receivabl e - Real estate notes receivable are recorded in other assets on the Company's Condensed Consolidated Balance Sheets. Fair value is estimated using cash flow analyses, based on current interest rates for similar types of arrangements. • Borrowings under the Unsecured Credit Facility and the Term Loans Due 2024 and 2026 - The carrying amount approximates fair value because the borrowings are based on variable market interest rates. • Senior Notes and Mortgage Notes payable - The fair value of notes and bonds payable is estimated using cash flow analyses, based on the Company’s current interest rates for similar types of borrowing arrangements. • Interest rate swap agreements - Interest rate swap agreements are recorded in other liabilities on the Company's Condensed Consolidated Balance Sheets at fair value. Fair value is estimated by utilizing pricing models, level 2 inputs, that consider forward yield curves and discount rates. The table below details the fair values and carrying values for notes and bonds payable and real estate notes receivable at September 30, 2023 and December 31, 2022. September 30, 2023 December 31, 2022 Dollars in millions CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE Notes and bonds payable 1 $ 5,227.4 $ 4,941.2 $ 5,351.8 $ 5,149.6 Real estate notes receivable 1 $ 155.0 $ 151.7 $ 99.6 $ 99.6 1 Level 2 – model-derived valuations in which significant inputs and significant value drivers are observable in active markets. 25 Table of Contents