What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-07 compared with 2023-11-03 · 97 added, 245 removed, 217 unchanged (61% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read together with the Consolidated Financial Statements and related Notes thereto included in Item 1 of this Quarterly Report on Form 10-Q.

Other important factors are identified in our Annual Report on Form 10-K for the year ended December 31, 2023, including factors identified under the headings “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations."

Unless stated otherwise or the context otherwise requires, references to "Healthcare Realty Trust" are to Legacy HTA after giving effect to the Merger and references to the "Company," "we," "us," and "our" are to Healthcare Realty Trust and, unless the context requires otherwise, its consolidated subsidiaries, including the OP.

Disclosure Regarding Forward-Looking Statements

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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;

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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, 2023.

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.

Liquidity and Capital Resources

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The Company’s primary sources of cash include rent receipts from its real estate portfolio based on contractual arrangements with its tenants, proceeds from the sales of real estate properties, joint ventures, and proceeds from public or private debt or equity offerings.

As of September 30, 2023, the Company had $1.3 billion available to be drawn on its Unsecured Credit Facility and $24.7 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.

As of March 31, 2024, the Company had $1.4 billion available to be drawn on its unsecured credit facility ("Unsecured Credit Facility") and available cash.

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.

Dividends paid by the Company for the three months ended March 31, 2024 were funded from cash flows from operations and the Unsecured Credit Facility, as cash flows from operations were not adequate to fully fund dividends, primarily as a result of the timing of interest payments.

The Company expects that cash flows from property operations will generate sufficient cash flows such that dividends for the full year 2024 can be funded by cash flows from operations or other sources of liquidity described above.

Investing Activities

Cash flows provided by investing activities for the nine months ended September 30, 2023 were approximately $112.5 million.

Below is a summary of significant investing activities.

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

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

Total real estate acquisitions $ 42,950 158,637

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.

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.

The Company disposed of 12 properties during the nine months ended September 30, 2023 for a total sales price of $430.8 million, including cash proceeds of $366.8 million.

The following table details these dispositions for the nine months ended September 30, 2023:

Dollars in thousands Date Disposed Sales Price Square Footage

Tampa, FL & Miami, FL 1

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

1/30/23 19,210 36,691

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

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

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

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

Atlanta, GA 8/22/23 25,142 55,195

Dallas, TX 9/15/23 115,000 161,264

Houston, TX 9/18/23 250 52,040

Chicago, IL 9/27/23 59,950 104,912

Total dispositions $ 430,772 922,922

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.

Cash flows used in investing activities for the three months ended March 31, 2024 were approximately $58.6 million.

Below is a summary of the investing activities.

The Company had no acquisitions for the three months ended March 31, 2024.

The Company had no real estate dispositions during the three months ended March 31, 2024.

Subsequent to March 31, 2024, the Company disposed of two medical outpatient buildings totaling 39,000 square feet for $5.8 million.

The two properties were held for sale as of March 31, 2024.

Capital Expenditures

During the nine months ended September 30, 2023, the Company incurred capital expenditures totaling $188.1 million for the following:

During the three months ended March 31, 2024, the Company incurred capital expenditures totaling $58.6 million for the following:

• $10.5 million toward active development and redevelopment of properties;

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Financing Activities

Cash flows used in financing activities for the nine months ended September 30, 2023 were approximately $521.3 million.

Cash flows used in financing activities for the three months ended March 31, 2024 were approximately $17.1 million.

See Notes 4 and 7 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 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.

Debt Activity

As of September 30, 2023, the Company had outstanding interest rate derivatives totaling $1.0 billion to hedge one-month Term SOFR.

As of March 31, 2024, the Company had outstanding interest rate derivatives totaling $1.1 billion to hedge one-month Term SOFR.

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

EXPIRATION DATE AMOUNT WEIGHTED

January 15, 2024 $ 200,000 1.21 %

May 2026 $ 275,000 3.74 %

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$ 1,075,000 3.92 %

During the third quarter of 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.

Additionally, 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.

Subsequent Debt 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.

Changes in Mortgage Notes Payable

During the first quarter of 2024, the Company repaid in full at maturity a mortgage note payable bearing interest at a rate of 4.77% per annum with an outstanding principal balance of $11.3 million.

The mortgage note encumbered a 63,012 square foot property in California.

Additionally, the Company repaid in full at maturity a mortgage note payable bearing interest at a rate of 4.12% per annum with an outstanding principal balance of $5.6 million.

T he mortgage note encumbered a 40,324 squ are foot property in Georgia .

Supplemental Guarantor Information

The OP has issued unsecured notes described in Note 4 to the Company's Condensed Consolidated Financial Statements included in this report.

All unsecured notes are fully and unconditionally guaranteed by the Company, and the OP is 98.6% owned by the Company.

Effective January 4, 2021, the Securities and Exchange Commission (the “SEC”) adopted amendments to the financial disclosure requirements which permit subsidiary issuers of obligations guaranteed by the parent to omit separate financial statements if the consolidated financial statements of the parent company have been filed, the subsidiary obligor is a consolidated subsidiary of the parent company, the guaranteed security is debt or debt-like, and the security is guaranteed fully and unconditionally by the parent.

Accordingly, as permitted under Rule 13-01(a)(4)(vi) of Regulation S-X, the Company has excluded the summarized financial information for the OP because the assets, liabilities, and results of operations of the OP are not materially different than the corresponding amounts in the Company's consolidated financial statements and management believes such summarized financial information would be repetitive and would not provide incremental value to investors.

Operating Activities

Cash flows provided by operating activities increased from $126.7 million for the nine months ended September 30, 2022 to $372.5 million for the nine months ended September 30, 2023.

Items impacting cash flows from operations include, but are not limited to, the Merger, cash generated from property operations, interest payments and the timing related to the payment of invoices and other expenses.

Cash flows provided by operating activities increased from $69.2 million for the three months ended March 31, 2023 to $76.2 million for the three months ended March 31, 2024.

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 or to repay indebtedness.

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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.

The Company reviews goodwill for impairment annually as of December 31 of each year or whenever events or changes in circumstances indicate that an impairment may exist.

During the third quarter of 2023, management identified qualitative factors indicating that an impairment may exist, including the sustained decrease in stock price.

As a result, the Company performed a quantitative assessment, and the fair value of the Company’s single reporting unit was estimated using a combination of discounted cash flow models and earnings multiples techniques.

The determination of fair value using the discounted cash flow model technique requires the use of estimates and assumptions related to revenue and expense growth rates, capitalization rates, discount rates, capital expenditures and working capital levels.

The determination of fair value using the earnings multiples technique requires assumptions to be made in relation to maintainable earnings and earnings multipliers.

These forecasts and assumptions are highly subjective, and while we believe our assumptions are reasonable, changes in these assumptions may have a material impact on our financial results.

Although the quantitative assessment as of September 30, 2023 indicated goodwill was not impaired, given the results of our quantitative assessment, the Company is at risk for future goodwill impairment because it is reasonably possible that, among other factors, continual stock price volatility and downward pressure on the Company's market capitalization could have a material impact on one or more of the estimates and assumptions used to evaluate goodwill.

Expiring Leases

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

There are 476 leases totaling 1.2 million square feet that will expire during the remainder of 2023.

There are 1,146 leases totaling 3.

5 million square feet that will expire during the remainder of 2024.

Approximately 75% of t he leases expiring during the remainder of 2024 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 nine months of the year was within this range.

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

Operating Expenses

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

As of September 30, 2023, leases for approximatel y 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.

As of March 31, 2024, leases for approximatel y 92% of the Company's total leased square footage allow for some recovery of operating expenses, with approxima tely 28% h aving modified gross lease structures and approxima tely 64% h aving net lease structures.

Purchase Options

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YEAR EXERCISABLE NUMBER OF PROPERTIES GROSS REAL ESTATE INVESTMENT AS OF

SEPTEMBER 30, 2023 1

MARCH 31, 2024 1

2025 5 93,860

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Normalized FFO is presented by adding to FFO acquisition-related costs, acceleration of debt issuance costs, debt extinguishment costs and other Company-defined normalizing items to evaluate operating performance.

FAD is presented by adding to Normalized FFO non-real estate depreciation and amortization, non-cash financing receivable amortization, loan origination cost

amortization, deferred financing fees amortization, stock-based compensation expense and rent reserves, net;

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.

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

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

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

The table below reconciles net income to FFO, Normalized FFO and FAD for the three months ended March 31, 2024 and 2023.

THREE MONTHS ENDED MARCH 31,

Amounts in thousands, except per share data 2024 2023

Net (loss) income attributable to common stockholders $ (67,844) $ 28,304 $ (237,728) $ 76,661

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

Net loss attributable to common stockholders $ (310,836) $ (87,125)

Net loss attributable to common stockholders per diluted share 1

$ (0.82) $ (0.23)

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Real estate depreciation and amortization 181,161 186,109

Non-controlling (loss) income from operating partnership units (841) 377 (2,935) 377

Non-controlling loss from operating partnership units (4,278) (1,067)

Proportionate share of unconsolidated joint ventures 4,568 4,841

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$ (0.30) $ 0.33

Acquisition and pursuit costs 2

769 482 1,725 3,137

Transaction costs 395 287

Merger-related costs 3

7,450 79,402 (3,366) 92,603

Merger-related fair value of debt instruments 10,105 10,864

Lease intangible amortization 175 146

Non-routine legal costs/forfeited earnest money received — 346 275 577

Allowance for credit losses 4

Debt financing costs (62) 1,091 (62) 2,520

Impairment of goodwill 250,530 —

Unconsolidated JV normalizing items 5

90 154 300 332

Normalized FFO adjustments $ 261,292 $ 24,868

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Normalized FFO attributable to common stockholders per common share - diluted $ 0.39 $ 0.40

$ 0.39 $ 0.39 $ 1.18 $ 1.23

Non-real estate depreciation and amortization 485 604

Non-cash interest amortization 6

1,402 8,924 3,703 10,382

Rent reserves, net (151) 1,371

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Unconsolidated JV non-cash items 7

(231) (377) (828) (890)

Normalized FFO adjusted for non-cash items $ 145,240 $ 150,775

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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.

2 For the three months ended March 31, 2024, basic weighted average common shares outstanding was the denominator used in the per share calculation.

3 Includes costs incurred related to the Merger.

For the nine months ended September 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 nine months ended September 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.

4 For the three months ended March 31, 2023, includes a $5.2 million credit allowance for a mezzanine loan included in "Impairment of real estate and credit loss reserves" on the Statement of Operations and $3.4 million reserve included in “Rental Income” on the Statement of Operations for previously deferred rent and straight line rent for three skilled nursing facilities.

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

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7 Includes the Company's proportionate share of straight-line rent, net related to unconsolidated joint ventures.

8 The Company utilizes the treasury stock method which includes the dilutive effect of nonvested share-based awards outstanding of 432,597 and 426,940, respectively, for the three and nine months ended September 30, 2023, and the diluted impact of 4,042,993 OP units outstanding for the three and nine months ended September 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.

8 The Company utilizes the treasury stock method which includes the dilutive effect of nonvested share-based awards outstanding of 254,261 and 401,937, respectively, for the three months ended March 31, 2024 and 2023, and the diluted impact of 3,681,225 OP Units outstanding for the three months ended March 31, 2024.

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

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

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

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

Merger Combined Same Store Cash NOI compares Cash NOI for stabilized properties.

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 nine months ended September 30, 2023 and 2022.

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

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

The following table reflects the Company's Same Store Cash NOI for the three months ended March 31, 2024 and 2023.

NUMBER OF PROPERTIES GROSS INVESTMENT

at September 30, 2023 MERGER COMBINED SAME STORE CASH NOI for the nine months ended September 30,

at March 31, 2024 SAME STORE CASH NOI for the three months ended March 31,

Dollars in thousands 2024 2023

Merger combined same store properties 584 $ 11,868,621 $ 538,486 $ 524,066

Same store properties 624 $ 12,512,764 $ 191,222 $ 185,796

Joint venture same store properties 33 352,845 $ 4,833 $ 4,563

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 nine months ended September 30, 2023 and 2022:

Reconciliations of Legacy HR and Merger Combined Same Store Cash NOI

MERGER COMBINED SAME STORE RECONCILIATION

NINE MONTHS ENDED SEPTEMBER 30,

The following tables reconcile net income to Same Store NOI and the same store property metrics to the total owned real estate portfolio for the three months ended March 31, 2024 and 2023:

Reconciliation of Same Store Cash NOI

SAME STORE RECONCILIATION

THREE MONTHS ENDED MARCH 31,

Dollars in thousands 2024 2023

Net (loss) income attributable to common stockholders $ (237,728) $ 76,661

Other expense (income) 281,846 (111,291)

Net loss $ (315,220) $ (88,078)

Other expense 327,646 94,407

General and administrative expense 14,787 14,935

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Other expenses 1

7,753 103,622

Straight-line rent revenue, net (24,720) (10,251)

Straight-line rent, net (7,633) (8,245)

Joint venture properties 4,958 4,769

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(7,006) (733)

621,935 364,180

Pre-Merger Legacy HTA NOI — 282,502

Cash NOI 200,378 209,474

Cash NOI not included in same store (4,323) (19,115)

Same store cash NOI 196,055 190,359

Same store joint venture properties (4,833) (4,563)

Merger combined same store cash NOI $ 538,486 $ 524,066

Includes acquisition and pursuit costs, Merger-related costs, rent reserves, above and below market ground lease intangible amortization, leasing commission amortization and ground lease straight-line rent expense.

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

LEGACY HR SAME STORE RECONCILIATION

NINE MONTHS ENDED SEPTEMBER 30,

Dollars in thousands 2023 2022

Net (loss) income attributable to common stockholders $ (237,728) $ 76,661

Other expense (income) 281,846 (111,291)

General and administrative expense 43,796 38,317

Depreciation and amortization expense 550,661 267,889

Other expenses 1

7,753 103,622

Straight-line rent revenue, net (24,720) (10,251)

Joint venture properties 14,418 8,480

Other revenue 2

(14,091) (9,247)

621,935 364,180

Cash NOI not included in same store (383,036) (134,761)

Legacy HR same store cash NOI 3

$ 238,899 $ 229,419

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.

Same store cash NOI (excluding JVs) $ 191,222 $ 185,796

Includes transaction costs, Merger-related costs, rent reserves, above and below market ground lease intangible amortization, leasing commission amortization and ground lease straight-line rent expense.

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

3 Legacy HR same store cash NOI includes 221 properties.

Reconciliation of Merger Combined Same Store Properties

AS OF SEPTEMBER 30, 2023

Reconciliation of Same Store Properties

AS OF MARCH 31, 2024

Dollars and square feet in thousands PROPERTY COUNT GROSS INVESTMENT 1

FEET OCCUPANCY

Merger combined same store properties

Same store properties

624 $ 12,512,764 36,101 89.5 %

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Results of Operations

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

The Company’s results of operations for the three months ended September 30, 2023 compared to the same period in 2022 were impacted by the Merger, acquisitions, developments, dispositions, gains on sale, and capital markets transactions.

Rental income increased $34.4 million, or 11.5%, for the three months ended September 30, 2023 compared to the prior year period.

This increase is primarily comprised of the following:

• Acquisitions in 2022 and 2023 contributed $3.7 million.

Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023

The Company’s results of operations for the three months ended March 31, 2024 compared to the same period in 2023 were impacted by acquisitions, developments, dispositions, gains on sale, and capital markets transactions.

Rental income decreased $6.0 million, or 1.9%, for the three months ended March 31, 2024 compared to the prior year period.

This decrease is primarily comprised of the following:

• Acquisitions in 2023 contributed $1.1 million.

• Leasing activity, including contractual rent increases, contributed $8.3 million.

• Dispositions in 2022 and 2023 resulted in a decrease of $5.7 million.

• Impact from the Merger contributed $27.3 million.

Interest income increased $0.9 million, or 26.7%, for the three months ended September 30, 2023 compared to the prior year period primarily as a result of a note receivable entered into with a buyer upon disposition of a property in the first quarter of 2023.

Other operating income increased $0.6 million, or 14.9%, for the three months ended September 30, 2023 compared to the prior year period primarily as a result of variable parking and management fees.

Property operating expenses increased $19.2 million, or 17.0%, for the three months ended September 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 $1.8 million.

• Dispositions in 2023 resulted in a decrease of $15.4 million.

Other operating income decreased $0.4 million, or 9.2%, for the three months ended March 31, 2024 compared to the prior year period primarily as a result of variable parking and management fees.

Property operating expenses decreased $1.0 million, or 0.8%, for the three months ended March 31, 2024 compared to the prior year period primarily as a result of the following activity:

• Acquisitions in 2023 resulted in an increase of $0.5 million.

• Increases in portfolio operating expenses as follows:

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◦ Janitorial expense of $0.7 million;

◦ Security expense of $0.2 million.

• Insurance expense decreased $0.4 million.

• Dispositions in 2022 and 2023 resulted in a decrease of $5.2 million.

• Impact from the Merger resulted in an increase of $19.1 million.

General and administrative expenses decreased approximately $3.3 million, or 20.0%, for the three months ended September 30, 2023 compared to the prior year period primarily as a result of the following activity:

◦ Insurance expense of $0.2 million.

• Decrease in compensation expense of $1.5 million.

• Dispositions in 2023 resulted in a decrease of $8.4 million.

General and administrative expenses decreased approximately $0.1 million, or 1.0%, for the three months ended March 31, 2024 compared to the prior year period primarily as a result of the following activity:

• Decrease in payroll and payroll related expenses of approximately $0.9 million.

• Decrease in cash compensation incentive expense of $0.6 million.

• Decrease in non-cash compensation incentive expense of $1.0 million.

• Net increases, primarily due to impacts from the Merger, including professional fees, audit services, insurance and other administrative costs, of $1.4 million.

Merger-related costs decreased $72.0 million, or 90.6%, for the three months ended September 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 of $17.8 million related to state transfer taxes.

Depreciation and amortization expense increased $24.9 million, or 15.7%, for the three months ended September 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 $1.5 million.

• Increase in cash compensation incentive expense of $0.7 million.

• Increase in non-cash compensation incentive expense of $0.5 million.

• Other decreases included legal and other administrative costs of $0.4 million.

Merger-related costs decreased $4.9 million for the three months ended March 31, 2024 compared to the prior year period primarily due to 2023 legal and consulting services in connection with the Merger.

Depreciation and amortization expense decreased $6.4 million, or 3.4%, for the three months ended March 31, 2024 compared to the prior year period primarily as a result of the following activity:

• Acquisitions in 2023 resulted in an increase of $0.7 million.

• Various building and tenant improvement expenditures resulted in an increase of $13.0 million.

• Dispositions in 2022 and 2023 resulted in a decrease of $5.7 million.

• Dispositions in 2023 resulted in a decrease of $11.5 million.

• Assets that became fully depreciated resulted in a decrease of $8.6 million.

• Impact from the Merger resulted in an increase of $27.0 million.

Other Income (Expense)

Gains on sale of real estate properties .

In the third quarter of 2023, the Company recognized gains of approximately $48.8 million.

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

The Company had no real estate dispositions in the first quarter of 2024.

In the first quarter of 2023, the Company recognized gains of approximately $1.0 million primarily on the disposition of one property.

Interest expense

Interest expense increased $13.3 million, or 25.0%, for the three months ended September 30, 2023 compared to the prior year period.

Interest expense decreased $2.7 million, or 4.2%, for the three months ended March 31, 2024 compared to the prior year period.

The components of interest expense are as follows:

THREE MONTHS ENDED SEPTEMBER 30, CHANGE

THREE MONTHS ENDED MARCH 31, CHANGE

Dollars in thousands 2024 2023 $ %

8 unchanged sentences

Total interest expense $ 61,054 $ 63,759 $ (2,705) (4.2) %

Contractual interest expense increased $11.9 million, or 28.3%, for the three months ended September 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 $3.3 million.

• New unsecured term loans executed with the amended credit facility accounted for an increase of approximately $8.4 million.

• The Company's Unsecured Term Loans due 2024 and 2026 accounted for an increase of approximately $2.7 million.

• The Unsecured Credit Facility accounted for an increase of approximately $2.0 million due to an increased weighted average balance outstanding and an increase in the weighted average interest rate.

Contractual interest expense decreased $1.3 million, or 2.6%, for the three months ended March 31, 2024 compared to the prior year period primarily as a result of the following activity:

• The Unsecured Term Loans accounted for an increase of approximately $3.3 million.

• The Unsecured Credit Facility accounted for a decrease of approximately $4.0 million due to a decreased weighted average balance outstanding.

• Active interest rate derivatives accounted for a decrease of $0.3 million.

1 unchanged sentence

Impairment of Real Estate Properties

In the third quarter of 2023, the Company recognized impairments totaling $56.9 million primarily due to the sale of two properties, 12 properties classified into held for sale, and six properties with changes in the expected holding periods.

In the first quarter of 2024, the Company recognized impairments totaling $15.9 million on four properties with changes in the expected holding periods, including one property reclassified to held for sale.

Impairment of Goodwill

The Company determined that the carrying value if its single reporting unit exceeded estimated fair value and therefore recorded a $250.5 million full impairment of its goodwill, which is recorded as a non-cash charge in “Impairment of goodwill” in the consolidated statements of operations.

See Note 1 to the Condensed Consolidated Financial Statements accompanying this report for more details.

Equity loss from unconsolidated joint ventures

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See Note 2 to the Condensed Consolidated Financial Statements accompanying this report for more details regarding the Company's unconsolidated joint ventures.

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

The Company’s results of operations for the nine months ended September 30, 2023 compared to the same period in 2022 were impacted by the Merger, acquisitions, developments, dispositions, gains on sale, and capital markets transactions.

Rental income increased $409.1 million, or 70.8%, for the nine months ended September 30, 2023 compared to the prior year period.

This increase is primarily comprised of the following:

• Acquisitions in 2022 and 2023 contributed $17.4 million.

• Leasing activity, including contractual rent increases, contributed $4.5 million.

• Dispositions in 2022 and 2023 resulted in a decrease of $20.0 million.

• Impact from the Merger contributed $407.2 million.

Interest income increased $5.5 million, or 75.3%, 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 $4.2 million, or 45.7%, from the prior year period primarily as a result of variable parking and asset management fees assumed in the Merger.

Property operating expenses increased $152.1 million, or 67.0%, for the nine months ended September 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 $7.8 million.

• Increases in portfolio operating expenses as follows:

◦ Utilities expense of $5.4 million;

◦ Maintenance and repair of $2.2 million;

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

◦ Janitorial expense of $1.5 million;

◦ Insurance expense of $0.3 million;

◦ Security expense of $0.1 million.

• Dispositions in 2022 and 2023 resulted in a decrease of $9.7 million.

• Payroll expense resulted in a decrease of $1.0 million.

• Impact from the Merger resulted in an increase of $143.4 million.

General and administrative expenses increased approximately $5.5 million, or 14.3%, for the nine months ended September 30, 2023 compared to the prior year period primarily as a result of the following activity:

• Decrease in payroll and payroll related expenses of $1.2 million.

• Decrease in incentive-based awards of $1.1 million.

• Decrease in non-cash compensation incentive expense of $0.7 million.

• Net increases, primarily due to impacts from the Merger, including professional fees, audit services, insurance, travel and other administrative costs, of $8.5 million.

Merger-related costs decreased $96.0 million, or 103.6%, for the nine months ended September 30, 2023 primarily due to a reduction in legal and consulting services in connection with the Merger, including a refund of $17.8 million related to state transfer taxes.

Depreciation and amortization expense increased $282.8 million, or 105.6%, for the nine months ended September 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 $9.3 million.

• Various building and tenant improvement expenditures resulted in an increase of $15.9 million.

• Dispositions in 2022 and 2023 resulted in a decrease of $4.7 million.

• Assets that became fully depreciated resulted in a decrease of $15.7 million.

• Impact from the Merger including a reset for fair value resulted in an increase of $278.0 million.

Other Income (Expense)

Gains on sale of real estate properties

Gains on the sale of real estate properties for the nine months ended September 30, 2023 and 2022 totaled $57.0 million and $197.2 million, respectively.

Interest expense

Interest expense increased $113.1 million, or 137.6%, for the nine months ended September 30, 2023 compared to the prior year period.

The components of interest expense are as follows:

NINE MONTHS ENDED SEPTEMBER 30, CHANGE

Dollars in thousands 2023 2022 $ %

Contractual interest $ 157,443 $ 68,470 $ 88,973 129.9 %

Net discount/premium accretion 29,025 7,747 21,278 274.7 %

Debt issuance costs amortization 4,376 2,760 1,616 58.6 %

Amortization of interest rate swap settlement 126 126 — — %

Amortization of treasury hedge settlement 320 320 — — %

Fair value derivative 3,414 1,732 1,682 97.1 %

Interest cost capitalization (2,077) (848) (1,229) 144.9 %

Interest on lease liabilities 2,770 1,941 829 42.7 %

Total interest expense $ 195,397 $ 82,248 $ 113,149 137.6 %

Contractual interest expense increased $89.0 million, or 129.9%, for the nine months ended September 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 $55.8 million.

• New unsecured term loans executed with the amended credit facility accounted for an increase of approximately $27.3 million.

• The Company's Unsecured Term Loans due 2024 and 2026, net of swaps, accounted for an increase of approximately $10.4 million.

• The Unsecured Credit Facility accounted for an increase of approximately $10.1 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 $14.4 million.

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

Impairment of Real Estate Properties and Credit Loss Reserves

During the nine months ended September 30, 2023, the Company recognized impairments totaling $138.3 million relating to six properties that were sold, one land parcel that was sold, 17 properties reclassified to held for sale and five additional properties due to changes in the expected holding periods.

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

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

Equity loss from unconsolidated joint ventures

The Company recognized its proportionate share of losses from its unconsolidated joint ventures, These losses are primarily attributable to non-cash depreciation expense.

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis