Healthcare Realty Trust Inc 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Disclosure Regarding Forward-Looking Statements This report and other materials the Company has filed or may file with the SEC, as well as information included in oral statements or other written statements made, or to be made, by senior management of the Company, contain, or will contain, disclosures that are “forward-looking statements.” Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “target,” “intend,” “plan,” “estimate,” “project,” “continue,” “should,” “could” and other comparable terms. These forward-looking statements are based on the current plans and expectations of management and are subject to a number of risks and uncertainties that could materially affect the Company’s current plans and expectations and future financial condition and results. Such risks and uncertainties as more fully discussed in Item 1A “Risk Factors” of this report and in other reports filed by the Company with the SEC from time to time include, among other things, the following: Risks relating to our business and operations • The Company's expected results may not be achieved; • The Company’s revenues depend on the ability of its tenants under its leases to generate sufficient income from their operations to make rental payments to the Company; • The Company's results of operations have been and will continue to be impacted negatively by the Steward Health and Prospect Medical bankruptcies; • Owning real estate and indirect interests in real estate is subject to inherent risks; • The Company may incur impairment charges on its real estate properties or other assets; • The Company has properties subject to purchase options that expose it to reinvestment risk and reduction in expected investment returns; • If the Company is unable to promptly re-let its properties, if the rates upon such re-letting are significantly lower than the previous rates or if the Company is required to undertake significant expenditures or make significant leasing concessions to attract new tenants, then the Company’s business, consolidated financial condition and results of operations would be adversely affected; • Certain of the Company’s properties are special purpose healthcare facilities and may not be easily adaptable to other uses; • The Company has, and in the future may have more, exposure to fixed rent escalators, which could lag behind inflation and the growth in operating expenses such as real estate taxes, utilities, insurance, and maintenance expense; • The Company’s real estate investments are illiquid and the Company may not be able to sell properties strategically targeted for disposition; • The Company is subject to risks associated with the development and redevelopment of properties; • The Company may make material acquisitions and undertake developments and redevelopments that may involve the expenditure of significant funds and may not perform in accordance with management’s expectations; • The Company is exposed to risks associated with geographic concentration; • Many of the Company’s leases are dependent on the viability of associated health systems. Revenue concentrations relating to these leases expose the Company to risks related to the financial condition of the associated health systems; • Many of the Company’s properties are held under ground leases. These ground leases contain provisions that may limit the Company’s ability to lease, sell, or finance these properties; • The Company may experience uninsured or underinsured losses; • Damage from catastrophic weather and other natural events, whether caused by climate change or otherwise, could result in losses to the Company; 26 • The Company faces risks associated with security breaches through cyber attacks, cyber intrusions, or otherwise, as well as other significant disruptions of its information technology networks and related systems; • The Company has structured and may in the future structure acquisitions of property in exchange for limited partnership units of the OP on terms that could limit its liquidity or flexibility; • Healthcare Realty Trust is a holding company with no direct operations and, as such, it relies on funds received from the OP to pay liabilities, and the interests of its stockholders will be structurally subordinated to all liabilities and obligations of the OP and its subsidiaries • The Company cannot assure you that it will be able to continue paying dividends at or above the rates previously paid; • Pandemics, and measures intended to prevent their spread or mitigate their severity could have a material adverse effect on the Company's business, results of operations, cash flows and financial condition; and • The Company's success depends, in part, on its ability to attract and retain talented employees. The loss of any one of the Company's key personnel or the inability to maintain appropriate staffing could adversely impact the Company's business. Risks relating to our capital structure and financings • The Company has incurred significant debt obligations and may incur additional debt and increase leverage in the future; • Covenants in the Company’s debt instruments limit its operational flexibility, and a breach of these covenants could materially affect the Company’s consolidated financial condition and results of operations; • If lenders under the Unsecured Credit Facility fail to meet their funding commitments, the Company’s operations and consolidated financial position would be negatively impacted; • The unavailability of equity and debt capital, volatility in the credit markets, increases in interest rates, or changes in the Company’s debt ratings could have an adverse effect on the Company’s ability to meet its debt payments, make dividend payments to stockholders or engage in acquisition and development activity; • Increases in interest rates could have a material adverse effect on the Company's cost of capital; • The Company's swap agreements may not effectively reduce its exposure to changes in interest rates; • The Company has entered into joint venture agreements that limit its flexibility with respect to jointly owned properties and expects to enter into additional such agreements in the future; • The U.S. federal income tax treatment of the cash that the Company might receive from cash settlement of a forward equity agreement is unclear and could jeopardize the Company's ability to meet the REIT qualification requirements; and • In case of our bankruptcy or insolvency, any forward equity agreements will automatically terminate, and the Company would not receive the expected proceeds from any forward sale of shares of its common stock. Risks relating to government regulations • The Company's property taxes could increase due to reassessment or property tax rate changes; • Trends in the healthcare service industry may negatively affect the demand for the Company’s properties, lease revenues and the values of its investments; • The costs of complying with governmental laws and regulations may adversely affect the Company's results of operations; • Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code; • If the Company fails to remain qualified as a REIT, the Company will be subject to significant adverse consequences, including adversely affecting the value of its common stock; • The Company’s articles of incorporation, as well as provisions of the MGCL, contain limits and restrictions on transferability of the Company’s common stock which may have adverse effects on the value of the Company’s common stock; 27 • Complying with the REIT requirements may cause the Company to forego otherwise attractive opportunities; • The prohibited transactions tax may limit the Company's ability to sell properties; • New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more difficult or impossible for the Company to qualify as a REIT; and • New and increased transfer tax rates may reduce the value of the Company’s properties. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in the Company’s filings and reports, including, without limitation, estimates and projections regarding the performance of development projects the Company is pursuing. Overview The Company owns and operates properties that facilitate the delivery of healthcare services in primarily outpatient settings. To execute its strategy, the Company engages in a broad spectrum of integrated services including leasing, management, acquisition, financing, development and redevelopment of such properties. The Company seeks to generate stable, growing income and lower the long-term risk profile of its portfolio of properties by focusing on facilities primarily located on or near the campuses of acute care hospitals associated with leading health systems. The Company seeks to reduce financial and operational risk by owning properties in high-growth markets with a broad tenant mix that includes over 30 physician specialties, as well as surgery, imaging, cancer, and diagnostic centers. As described in Item 1. Business above and elsewhere in this report, on July 20, 2022, Legacy HR and Legacy HTA completed a merger between the companies in which Legacy HR merged with and into a wholly-owned subsidiary of Legacy HTA, with Legacy HR continuing as the surviving entity and a wholly-owned subsidiary of Legacy HTA. Immediately following the Merger, Legacy HTA changed its name to “Healthcare Realty Trust Incorporated.” For accounting purposes, the Merger was treated as a “reverse acquisition” in which Legacy HR was considered the acquirer. Accordingly, the information discussed in this section reflects, for periods prior to the closing of the Merger, the financial condition and results of operations of Legacy HR, and for periods from the closing of the Merger, that of the Company. This section is organized into the following sections: • Liquidity and Capital Resources; • Trends and Matters Impacting Operating Results; • Results of Operations; • Non-GAAP Financial Measures and Key Performance Indicators; and • Application of Critical Accounting Policies to Accounting Estimates. Liquidity and Capital Resources The Company monitors its liquidity and capital resources and considers several indicators in its assessment of capital markets for financing acquisitions and other operating activities. The Company considers, among other factors, its leverage ratios and lending covenants, dividend payout percentages, interest rates, underlying treasury rates, debt market spreads and cost of equity capital to compare its operations to its peers and to help identify areas in which the Company may need to focus its attention. Sources and Uses of Cash The Company's revenues are derived from its real estate property portfolio based on contractual arrangements with its tenants. These sources of revenue represent the Company's primary source of liquidity to fund its dividends and its operating expenses, including interest incurred on debt, principal payments on debt, general and administrative costs, capital expenditures and other expenses incurred in connection with managing its existing portfolio and investing in additional properties. To the extent additional investments are not funded by these sources, the 28 Company will fund its investment activity generally through equity or debt issuances either in the public or private markets, asset sales and joint venture contributions or through proceeds from the Unsecured Credit Facility. The Company expects to continue to meet its liquidity needs, including capital for additional investments, tenant improvement allowances, operating and finance lease payments, paying dividends, and funding debt service, through cash on hand, cash flows from operations and the cash flow sources addressed above. See Note 4 to the Consolidated Financial Statements for additional discussion of operating and financing lease payment obligations. See "Trends and Matters Impacting Operating Results" for additional information regarding the Company's sources and uses of cash. The Company also had unencumbered real estate assets with a gross book value of approximately $11.7 billion at December 31, 2024, of which a portion could serve as collateral for secured mortgage financing. The Company believes that its 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. The Company has exposure to variable interest rates and its common stock price is impacted by the volatility in the stock markets. However, the Company’s leases, which provide its main source of income and cash flow, have terms of approximately one to 20 years and have lease rates that generally increase on an annual basis at fixed rates or based on consumer price indices. Operating Activities Cash flows provided by operating activities for the two years ended December 31, 2024 and 2023 were $501.6 million and $499.8 million, respectively. Several items impact cash flows from operating activities including, but not limited to, cash generated from property operations, interest payments and the timing related to the payment of invoices and other expenses and receipt of tenant rent. The Company may, from time to time, sell properties and redeploy cash from property sales into new investments. To the extent revenues related to the properties being sold exceed income from these new investments, the Company's consolidated results of operations and cash flows could be adversely affected. See "Trends and Matters Impacting Operating Results" for additional information regarding the Company's operating activities. Investing Activities A summary of the significant transactions impacting investing activities for the year ended December 31, 2024 is listed below. See Note 5 to the Consolidated Financial Statements for more detail on these activities. The Company had no real estate acquisition activity for the year ended December 31, 2024. Investment in Unconsolidated Joint Ventures In 2024, the Company's investment in unconsolidated joint ventures increased by $172.7 million, as a result of the Company's contribution of medical outpatient properties to two joint ventures in which it holds a 20% interest. Capital Funding In 2024, the Company incurred capital expenditures totaling $303.9 million for the following: • $150.6 million toward development and redevelopment of properties; • $52.4 million toward first generation tenant improvements and planned capital expenditures for acquisitions; • $68.4 million toward second generation tenant improvements; and • $32.5 million toward capital expenditures. See "Trends and Matters Impacting Operating Results" below for more detail. Real Estate Notes Receivable On June 24, 2024, the Company's two mezzanine loans in Texas with a total principal balance of $54.1 million matured. On July 15, 2024, the senior lender on the construction mortgage loans associated with the underlying project initiated foreclosure proceedings to the borrower. In the third quarter of 2024, the Company recorded an allowance for credit loss of $46.8 million to cover the entire carrying amount for these loans. The Company had 29 previously placed the mezzanine loans on non-accrual status in 2023. In the fourth quarter of 2024, the underlying project was sold, and the Company received $4.0 million as consideration for its mezzanine loan interests. The Company no longer has a mezzanine loan position in connection with the project. In 2024, the Company placed one of its real estate notes receivable with a principal balance of $31.2 million on non-accrual status. The Company determined that the risk of credit loss was no longer remote and recorded a credit loss reserve of $16.8 million including $0.5 million of accrued interest in 2024. In January 2025, the underlying real estate collateral was sold and the Company received $14.9 million towards the principal balance of this loan. See Note 1 to the Consolidated Financial Statements accompanying this report for more information about real estate notes receivable and allowance for credit losses. Dispositions The following table details the Company's asset sales and joint venture contributions for the year ended December 31, 2024: Dollars in thousands DATE DISPOSED SALE PRICE CLOSING COSTS & CREDITS COMPANY-FINANCED MORTGAGE NOTES NET CONSIDERATION NET REAL ESTATE INVESTMENT OTHER GAIN/(IMPAIR-MENT) SQUARE FOOTAGE Albany, NY 4/1/24 $ 725 $ (60) $ — $ 665 $ 765 $ (82) $ (18) 14,800 San Angelo, TX 4/12/24 5,085 (128) — 4,957 4,917 66 (26) 24,580 Houston, TX 5/20/24 250 (9) — 241 713 (520) 48 37,040 Multiple 1 5/23/24 284,348 (14,270) — 270,078 254,176 25,836 (9,934) 556,274 Denver, CO 5/30/24 19,000 (628) — 18,372 18,522 165 (315) 37,130 Austin, TX 1 6/6/24 54,858 (1,575) — 53,283 27,964 623 24,696 129,879 Minneapolis, MN 6/21/24 1,082 (144) — 938 303 43 592 50,291 Raleigh, NC 2 6/28/24 99,518 (2,835) — 96,683 86,810 906 8,967 309,424 Albany, NY 8/2/24 6,300 (847) — 5,453 5,528 486 (561) 180,000 Charlotte, NC 8/6/24 26,670 (395) — 26,275 14,853 613 10,809 90,633 Charleston, SC 8/13/24 14,500 (589) — 13,911 11,488 1 2,422 46,711 Multiple 1 8/23/24 118,000 (8,615) — 109,385 113,956 548 (5,119) 266,782 Multiple 3 8/27/24 177,250 (7,085) — 170,165 169,545 5,363 (4,743) 473,003 Austin, TX 9/13/24 42,281 (1,257) — 41,024 14,561 425 26,038 76,246 Raleigh, NC 9/26/24 1,813 (27) — 1,786 1,694 50 42 5,934 Houston, TX 4 10/3/24 12,000 (1,001) (9,630) 1,369 11,266 295 (563) 140,012 Greensboro, NC 10/9/24 12,514 (21) — 12,493 10,152 296 2,045 35,373 Des Moines, IA 10/15/24 31,750 (1,320) — 30,430 13,869 1,662 14,899 95,486 Albany, NY 10/15/24 9,500 (521) — 8,979 7,823 1,193 (37) 80,676 Salt Lake City, UT 5 10/24/24 30,712 (8,962) — 21,750 26,899 (9,406) 4,257 112,192 Miami, FL 10/25/24 36,789 (706) — 36,083 35,925 (209) 367 102,186 Miami, FL 6 10/25/24 17,767 (718) — 17,049 14,650 (210) 2,609 60,761 Cleveland, OH 12/10/24 1,000 (157) — 843 1,454 57 (668) 31,152 Boise, ID 7 12/12/24 18,350 (2,003) — 16,347 17,562 345 (1,560) 83,078 Multiple 1 12/18/24 310,250 (6,767) — 303,483 321,437 6,616 (24,570) 766,622 Atlanta, GA 12/20/24 15,900 (1,318) — 14,582 13,344 635 603 42,921 Los Angeles, CA 7 12/20/24 64,000 (4,805) — 59,195 47,322 1,676 10,197 162,554 Tampa, FL 12/27/24 37,500 (402) — 37,098 41,556 (1,962) (2,496) 95,896 Wichita Falls, TX 12/27/24 600 (130) — 470 2,530 14 (2,074) 25,133 Total dispositions $ 1,450,312 $ (67,295) $ (9,630) $ 1,373,387 $ 1,291,584 $ 35,525 $ 55,907 4,132,769 1 The Company contributed the following medical outpatient properties to a joint venture in which the Company retained 20% ownership: one in each of Raleigh, NC, New York, NY, Philadelphia, PA, Atlanta, GA, Austin, TX, Miami, FL, Denver, CO, Memphis, TN, Indianapolis, IN, and Honolulu, HI; two MOBs in Los Angeles; three MOBs in Houston, TX and Dallas, TX; and five in Seattle, WA. Sale price and square footage reflect the total sale price paid by the joint venture and total square footage of the property. The net proceeds to the Company related to these dispositions totaled $584.9 million. 2 The Company sold seven MOBs in Greensboro, NC and two non-clustered single-tenant MOBs in Raleigh, NC to a single buyer in a single transaction. 30 3 The Company contributed the following medical outpatient properties to a joint venture in which the Company retained 20% ownership: one in each of Dallas, TX, San Antonio, TX and Atlanta, GA; and two MOBs in each of Nashville, TN and Denver, CO. Sale price and square footage reflect the total sale price paid by the joint venture and total square footage of the property. The net proceeds to the Company related to these dispositions totaled $148.9 million. 4 The Company provided seller financing of approximately $9.6 million in connection with this sale. 5 The Company sold an MOB that was included in a consolidated joint venture in which the Company held a 63% ownership interest. Proceeds include the Company's pro-rata share of the purchase price as well as amounts due to the Company by the joint venture. 6 Includes two properties. 7 Includes three properties. Subsequent Dispositions On February 7, 2025, the Company disposed of a 30,304 square foot medical outpatient building in Boston, Massachusetts for $4.5 million. On February 14, 2025, the Company disposed of two medical outpatient buildings in Denver, Colorado, with a combined total of 69,715 square feet for an aggregate purchase price of $8.6 million. Financing Activities Common Stock Repurchases During 2024, the Company repurchased 30.8 million shares of its common stock at an average price of $16.56 per share for a total of $509.8 million. As of December 31, 2024, the Company had $237.0 million of authorized share repurchases remaining. Debt Activity Below is a summary of the significant debt financing activity for the year ended December 31, 2024. See Note 10 to the Consolidated Financial Statements for additional information on financing activities. Mortgage Activity The following table details the mortgage note repayment activity for the year ended December 31, 2024: (dollars in millions) TRANSACTION DATE PRINCIPAL BORROWING (REPAYMENT) ENCUMBERED SQUARE FEET CONTRACTUAL INTEREST RATE Mortgages repaid at maturity: West Hills, CA 1/6/2024 $ (11.3) 63,012 4.77 % Atlanta, GA 2/1/2024 (5.6) 40,324 4.12 % Minnesota 9/1/2024 (7.0) 64,143 4.15 % Total repayments $ (23.9) 167,479 4.44 % Term Loans During 2024, the Company repaid its $350 million Unsecured Term Loan, due 2025 and recognized approximately $0.2 million of accelerated amortization expense included in the loss on extinguishment of debt. Subsequent Activity On January 7, 2025, the Company made a partial repayment of $25 million on its $200 million Unsecured Term Loan due 2025 . On January 14, 2025 the Company made a partial repayment of $10 million on its $300 million Unsecured Term Loan due 2025 . Interest Rate Swaps As of December 31, 2024, the Company had outstanding interest rate derivatives totaling approximately $1.1 billion to hedge one-month Secured Overnight Financing Rate (“SOFR”). The following details the amount and rate of each swap as of such date (dollars in thousands): 31 EXPIRATION AMOUNT WEIGHTED AVERAGE RATE May 2026 $ 275,000 3.74 % June 2026 150,000 3.83 % December 2026 150,000 3.84 % June 2027 200,000 4.27 % December 2027 300,000 3.93 % Total $ 1,075,000 3.92 % The following table details the Company's debt balances as of December 31, 2024: PRINCIPAL BALANCE CARRYING BALANCE 1 WEIGHTED YEARS TO MATURITY 2 CONTRACTUAL RATE EFFECTIVE RATE Senior Notes due 2025 $ 250,000 $ 249,868 0.3 3.88 % 4.12 % Senior Notes due 2026 3 600,000 586,824 1.6 3.50 % 4.94 % Senior Notes due 2027 3 500,000 488,104 2.5 3.75 % 4.76 % Senior Notes due 2028 300,000 298,029 3.0 3.63 % 3.85 % Senior Notes due 2030 3 650,000 586,028 5.1 3.10 % 5.30 % Senior Notes due 2030 299,500 297,190 5.2 2.40 % 2.72 % Senior Notes due 2031 299,785 296,343 6.2 2.05 % 2.25 % Senior Notes due 2031 3 800,000 667,233 6.2 2.00 % 5.13 % Total Senior Notes Outstanding 3,699,285 3,469,619 2.97 % 4.44 % $1.5 billion unsecured credit facility 4 — — 2.8 SOFR + 0.94% 5.30 % $200 million unsecured term loan 200,000 199,896 1.4 SOFR + 1.04% 5.59 % $150 million unsecured term loan 150,000 149,790 1.4 SOFR + 1.04% 5.59 % $300 million unsecured term loan 3 300,000 299,981 1.8 SOFR + 1.04% 5.59 % $200 million unsecured term loan 3 200,000 199,641 2.5 SOFR + 1.04% 5.59 % $300 million unsecured term loan 300,000 298,708 3.0 SOFR + 1.04% 5.59 % Mortgage notes payable 45,279 45,136 1.3 4.04 % 4.17 % Total Outstanding Notes and Bonds Payable $ 4,894,564 $ 4,662,771 3.59 % 4.72 % 1 Balances are reflected net of discounts and debt issuance costs and include premiums. 2 Includes extension options. 3 Debt instruments assumed as part of the Merger with Legacy HTA on July 20, 2022. The amounts shown represent fair value adjustments. 4 As of December 31, 2024, the Company had no outstanding borrowings under the Unsecured Credit Facility with a remaining borrowing capacity of $1.5 billion. Debt Covenant Information The Company’s various debt agreements contain certain representations, warranties, and financial and other covenants customary in such debt agreements. Among other things, these provisions require the Company to maintain certain financial ratios and impose certain limits on the Company’s ability to incur indebtedness and create liens or encumbrances. As of December 31, 2024, the Company was in compliance with the financial covenant provisions under all of its various debt instruments. As of December 31, 2024, 68.4% of the Company’s principal balances were due after 2026, including extension options. Also, as of December 31, 2024, the Company's incurrence of total debt as defined in the senior notes [debt divided by (total assets less intangibles and accounts receivable)] was approximately 38.0% (cannot be greater than 60%) and debt service coverage [interest expense divided by (net income plus interest expense, taxes, depreciation and amortization, gains and impairments)] was approximately 3.1 times (cannot be less than 1.5 times). The Company plans to manage its capital structure to maintain compliance with its debt covenants consistent with its current profile. Downgrades in ratings by the rating agencies could have a material adverse impact on the Company’s cost and availability of capital, which could in turn have a material adverse impact on consolidated results of operations, liquidity and/or financial condition. 32 Supplemental Guarantor Information The OP has issued unsecured notes described in Note 10 to the Company's Consolidated Financial Statements included in this report. All unsecured notes are fully and unconditionally guaranteed by the Company, and the OP is 98.7% 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. Trends and Matters Impacting Operating Results Management monitors factors and trends important to the Company and the REIT industry in order to gauge their potential impact on the operations of the Company. Discussed below are some of the factors and trends that management believes may impact the future operations of the Company. Economic and Market Conditions Rising interest rates and increased volatility in the capital markets have increased the Company’s cost and availability of debt and equity capital. Limited availability and increases in the cost of capital could adversely impact the Company’s ability to finance operations and acquire and develop properties. To the extent the Company’s tenants experience increased costs or financing difficulties due to the economic and market conditions, they may be unable or unwilling to make payments or perform their obligations when due. Additionally, increased interest rates may also result in less liquid property markets, limiting the Company’s ability to sell existing assets or obtain joint venture capital. Acquisitions and Dispositions In 2024, the Company completed no property acquisitions. The Company disposed of 67 properties in 2024 for sales prices totaling $1.5 billion, including 30 properties contributed into two joint ventures in which the Company maintains a non-controlling interest. These transactions yielded net cash proceeds of $1.2 billion, net of $67.3 million of closing costs and related adjustments and $172.7 million of retained joint venture interests. The weighted average capitalization rate for these properties was 6.6%. The Company calculates the capitalization rate for dispositions as the in-place cash net operating income divided by the sales price. See the Company's discussion of its 2024 disposition activity in Note 5 to the Consolidated Financial Statements. Development and Redevelopment Activity The table below details the Company’s activity related to its active development and redevelopment projects as of December 31, 2024. The information included in the table below represents management’s estimates and expectations at December 31, 2024, which are subject to change. The Company’s disclosures regarding certain projections or estimates may not reflect actual results. 33 ESTIMATED REMAINING FUNDINGS ESTIMATED TOTAL INVESTMENT APPROXIMATE SQUARE FEET Dollars in thousands NUMBER OF PROPERTIES TOTAL FUNDED DURING THE YEAR TOTAL AMOUNT FUNDED Development Activity Raleigh, NC 1 $ 11,602 $ 44,994 $ 7,606 $ 52,600 122,991 Phoenix, AZ 1 33,609 54,950 3,050 58,000 101,086 Fort Worth, TX 1 30,076 30,076 18,124 48,200 101,000 Total $ 75,287 $ 130,020 $ 28,780 $ 158,800 325,077 Redevelopment Activity Washington, DC 3 $ 5,075 $ 15,853 $ 1,704 $ 17,557 259,290 Houston, TX 3 7,878 13,561 16,439 30,000 314,861 Charlotte, NC 2 13,519 17,409 1,291 18,700 169,135 Washington, DC 1 4,212 8,995 1,083 10,078 57,323 White Plains, NY 1 4,601 4,601 14,799 19,400 65,851 Raleigh, NC 1 768 768 10,032 10,800 40,400 Total $ 36,053 $ 61,187 $ 45,348 $ 106,535 906,860 For previously completed development and redevelopment projects, during 2024, the Company funded an additional $39.2 million related to ongoing tenant improvements. The Company maintains discussions with health systems and developers regarding long-term future new development opportunities. In addition, the Company continually evaluates its portfolio for accretive redevelopment opportunities. Security Deposits and Letters of Credit As of December 31, 2024, the Company held approximately $33.4 million in letters of credit and security deposits for the benefit of the Company in the event the obligated tenant fails to perform under the terms of its respective lease. Generally, the Company may, at its discretion and upon notification to the tenant, draw upon these instruments if there are any defaults under the leases. Expiring Leases The Company expects that approximately 15% of the leases in its portfolio will expire each year. In-place leases have a weighted average lease term of 8.3 years and a weighted average remaining lease term of 4.2 years. Demand for well-located real estate with complementary practice types and services remains consistent, and the Company's 2024 quarterly tenant retention statistics ranged from 81% to 85%. In 2025, the Company has 1,359 leases totaling 4.3 million square feet in its multi-tenant portfolio that are scheduled to expire. See additional information regarding expiring single-tenant leases under the heading "Single-Tenant Leases" below. The Company seeks contractual rent increases for in-place leases. As of December 31, 2024 and 2023, the Company's contractual rental rate growth averaged 2.83% and 2.82%, respectively, for in-place leases. In addition, the Company continued to see strong quarterly weighted average rental rate growth for renewing leases ("cash leasing spread"). In 2024, cash leasing spreads averaged 3.3%. In a further effort to maximize revenue growth and reduce its exposure to key expenses such as taxes and utilities, the Company carefully manages its balance of lease types. Gross leases, wherein the Company has full exposure to all operating expenses, comprise 9% of its lease portfolio. Modified gross or base year leases, in which the Company and tenant both pay a share of operating expenses, comprise 28% of the Company's leased portfolio. Net leases, in which tenants pay substantially all operating expenses, total 59% of the leased portfolio. Absolute net leases, in which tenants pay substantially all of the building's operating and capital expenses, comprise 4%. 34 Steward Health As previously disclosed, on May 6, 2024, Steward Health announced that it had filed petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Texas. Prior to the bankruptcy filing, Steward leased approximately 593,000 square feet of space from the Company. Leases for six buildings in Massachusetts totaling approximately 244,000 square feet were assumed in connection with the sale of Steward’s Massachusetts hospitals on or about September 30, 2024. In October 2024, the Company received $2.2 million for prior rent owed under these assumed leases. Leases for approximately 349,000 square feet in buildings in Florida and Massachusetts were rejected by Steward. The total annual revenue associated with the rejected leases was approximately $13.0 million. The Company made significant progress re-leasing space previously occupied by Steward Health, with leases representing over 80% of the rejected Steward Health square feet. Prospect Medical On January 11, 2025, Prospect Medical Holdings filed petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of Texas. Prospect leases approximately 80,912 square feet of space from the Company, accounting for approximately $2.9 million of annual revenue. The Company moved to cash basis accounting for these leases and recorded a reserve of $0.7 million in the fourth quarter. While it is early in the bankruptcy proceedings and the Company is in discussions with Prospect regarding its leases with the Company, there can be no assurance that the Company will recover unpaid rent from Prospect. Capital Expenditures Capital expenditures are long-term investments made to maintain and improve the physical and aesthetic attributes of the Company's owned properties. Examples of such improvements include, but are not limited to, material changes to, or the full replacement of, major building systems (exterior facade, building structure, roofs, elevators, mechanical systems, electrical systems, energy management systems, upgrades to existing systems for improved efficiency) and common area improvements (furniture, signage and artwork, bathroom fixtures and finishes, exterior landscaping, parking lots or garages). These additions are capitalized into the gross investment of a property and then depreciated over their estimated useful lives, typically ranging from 7 to 20 years. Capital expenditures specifically do not include recurring maintenance expenses, whether direct or indirect, related to the upkeep and maintenance of major building systems or common area improvements. Capital expenditures also do not include improvements related to a specific tenant suite, unless the improvement is part of a major building system or common area improvement. The Company invested $32.5 million, or $0.94 per square foot, in capital expenditures in 2024 and $47.7 million, or $1.24 per square foot, in capital expenditures in 2023. As a percentage of cash net operating income, 2024 and 2023 capital expenditures were 4.1% and 5.8%, respectively. For a reconciliation of cash net operating income, see "Same Store Cash NOI" in the "Non-GAAP Financial Measures and Key Performance Indicators" section as part of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations included in Part II of this report. Tenant Improvements The Company may invest in tenant improvements for the purpose of refurbishing or renovating tenant space. The Company categorizes these expenditures into first and second generation tenant improvements. As of December 31, 2024, the Company had commitments of approximately $212.8 million that are expected to be spent on tenant improvements throughout the portfolio, excluding development properties currently under construction. First Generation Tenant Improvements & Planned Capital Expenditures for Acquisitions First generation tenant improvements and planned capital expenditures for acquisition spending totaled $52.4 million and $38.7 million for the years ended December 31, 2024 and 2023, respectively. First generation tenant improvements include build out costs related to suite space in shell condition. Planned capital expenditures for acquisitions include expected near-term fundings that were contemplated as part of the acquisition. Second Generation Tenant Improvements Second generation tenant improvements spending totaled $68.4 million in 2024, or 8.7% of total cash net operating income. In 2023, this spending totaled $63.5 million, or 7.7% of total cash net operating income. 35 If the cost of a tenant improvement project exceeds a tenant improvement allowance, the Company generally offers the tenant the option to finance the excess over the lease term with interest or to reimburse the overage to the Company in a lump sum. In either case, such overages are amortized by the Company as rental income over the term of the lease. Interest earned on tenant overages is included in other operating income in the Company's Consolidated Statements of Operations. The first and second generation tenant overage amount amortized to rent, including interest, totaled approximately $7.8 million in 2024, $8.4 million in 2023, and $7.5 million in 2022. Second generation tenant improvement commitments in 2024 for renewals averaged $2.14 per square foot per lease year, ranging quarterly from $1.80 to $2.39. In 2023, these commitments averaged $1.78 per square foot per lease year, ranging quarterly from $1.64 to $1.89. In 2022, these commitments averaged $1.76 per square foot per lease year, ranging quarterly from $1.46 to $1.90. Second generation tenant improvement commitments in 2024 for new leases averaged $7.22 per square foot per lease year, ranging quarterly from $6.93 to $7.34. In 2023, these commitments averaged $5.69 per square foot per lease year, ranging quarterly from $4.44 to $7.11. In 2022, these commitments averaged $5.74 per square foot per lease year, ranging quarterly from $4.84 to $7.07. Leasing Commissions In certain markets, the Company may pay leasing commissions to real estate brokers who represent either the Company or prospective tenants, with commissions generally equating to 4% to 6% of the gross lease value for new leases and 2% to 4% of the gross lease value for renewal leases. In addition, the Company pays its leasing employees incentive compensation when leases are executed that meet certain leasing thresholds. External leasing commissions are amortized to property operating expense, and internal leasing costs are amortized to general and administrative expense in the Company's Consolidated Statements of Operations. In 2024, the Company paid leasing commissions of approximately $47.1 million, or $1.37 per square foot. In 2023, the Company paid leasing commissions of approximately $35.9 million, or $0.93 per square foot. In 2022, the Company paid leasing commissions of approximately $22.9 million, or $0.57 per square foot. As a percentage of total cash net operating income, leasing commissions paid for 2024, 2023 and 2022 were 6.0%, 4.3% and 4.0%, respectively. The amount of leasing commissions amortized over the term of the applicable leases totaled $21.2 million, $13.8 million and $11.0 million for the years ended December 31, 2024, 2023 and 2022, respectively. Rent Abatements Rent abatements, which generally take the form of deferred rent, are sometimes used to help induce a potential tenant to lease space in the Company's properties. Such abatements, when made, are amortized by the Company on a straight-line basis against rental income over the lease term. Rent abatements for 2024 totaled approximately $16.0 million, or $0.46 per square foot. Rent abatements for 2023 totaled approximately $14.3 million, or $0.37 per square foot. Rent abatements for 2022 totaled approximately $14.8 million, or $0.37 per square foot. Single-Tenant Leases As of December 31, 2024, the Company had a total of 110 single-tenant buildings, with a weighted average lease term of 11.6 years and a weighted average remaining lease term of 5.5 years. Twenty-two single-tenant buildings have leases that expire in 2025. Five of these leases have been renewed. The Company is in negotiations with tenants in fifteen of these buildings and expects the leases to be renewed or the building to be backfilled. The Company expects the tenants of two of these single-tenant buildings to vacate the buildings upon lease expiration. The annual base rent for leases that are not expected to renew or be backfilled in 2025 is $4.1 million. Operating Leases As of December 31, 2024, the Company was obligated to make rental payments under operating lease agreements consisting primarily of ground leases related to 142 real estate investments, excluding those ground leases the Company has prepaid. As of December 31, 2024, the Company had 215 properties totaling 16.1 million square feet that were held under ground leases with a remaining weighted average term of 63.6 years, including renewal options. 36 These ground leases typically have initial terms of 50 to 75 years with one or more renewal options extending the terms to 75 to 100 years, with expiration dates through 2119. Purchase Options The Company had approximately $111.4 million in real estate properties as of December 31, 2024 that were subject to exercisable purchase options. The Company has approximately $1.1 billion in real estate properties that are subject to purchase options that will become exercisable after 2024. Additional information about the amount and basis for determination of the purchase price is detailed in the table below (dollars in thousands): YEAR EXERCISABLE NUMBER OF PROPERTIES GROSS REAL ESTATE INVESTMENT AS OF DECEMBER 31, 2024 1 Current 2 6 $ 111,399 2025 5 99,970 2026 6 173,761 2027 4 112,305 2028 5 136,814 2029 3 82,026 2030 — — 2031 4 106,839 2032 2 23,848 2033 — — 2034 — — 2035 and thereafter 3 9 326,103 Total 44 $ 1,173,065 1 Purchase option prices are based on fair market value components that are determined by an appraisal process, except for three properties totaling $45.4 million wi th stated prices or prices based on fixed capitalization rates. 2 These purchase options have been exercisable for an average of 15.1 years. 3 Includes two medical outpatient properties tha t are recorded in the line item Investment in financing receivable, net on the Company's Consolidated Balance Sheet. Debt Management The Company maintains a flexible capital structure that allows it to fund new investments and operate its existing portfolio. The Company has approximately $45.3 million of mortgage notes payable, maturing in 2025 and 2026 , most of which were assumed when the Company acquired properties. The Company will repay mortgages with cash on hand or borrowings under the Unsecured Credit Facility. The Company had $1.5 billion of outstanding debt that matures in 2025 and 2026. See additional information in “Liquidity and Capital Resources - Financing Activities” above. 37 Impact of Inflation The Company is subject to the risk of inflation as most of its revenues are derived from long-term leases. Most of the Company's leases provide for fixed increases in base rents or increases based on the Consumer Price Index and require the tenant to pay all or some portion of increases in operating expenses. The Company believes that these provisions mitigate the impact of inflation. However, there can be no assurance that the Company's ability to increase rents or recover operating expenses will keep pace with inflation. The Company's leases have a weighted average lease term remaining of approximately 4.2 years. As of December 31, 2024 , 95.6% of the Company's leases provide for fixed base rent increases and 4.4% provide for Consumer Price Index-based rent increases. New Accounting Pronouncements See Note 1 to the Consolidated Financial Statements for information on new accounting standards including both standards that the Company adopted during the year and those that have not yet been adopted. The Company continues to evaluate the impact of the new standards that have not yet been adopted. Other Items Impacting Operations General and administrative expenses will fluctuate quarter-to-quarter. In the first quarter of each year, general and administrative expense include increases for certain expenses such as payroll taxes and healthcare savings account fundings. The Company expects these customary expenses to increase by approximately $0.9 million in the first quarter of 2025. Approximately $0.8 million is not expected to recur in subsequent quarters in 2025. Results of Operations Year Ended December 31, 2024 Compared to Year Ended December 31, 2023 The Company’s consolidated results of operations for 2024 compared to 2023 were impacted by acquisitions, developments, dispositions, gain on sales and impairment charges recorded on real estate properties, and capital markets transactions. Revenues Rental income decreased $76.4 million, or 5.8%, as a result of the following: • Dispositions in 2023 and 2024 resulted in a decrease of $96.3 million. • Acquisitions and developments in 2023 and 2024 contributed $2.3 million. • Leasing activity, including contractual rent increases contributed $24.5 million. • Reversed revenue related to the Steward bankruptcy resulted in a decrease of $6.2 million, including straight-line rent of $2.7 million. • Reversed revenue related to the Prospect Medical bankruptcy resulted in a decrease of $0.7 million. Other operating income increased $1.7 million, or 9.8%, from the prior year primarily as a result of income from management fees. Expenses Property operating expenses decreased $27.0 million, or 5.4%, from the prior year primarily as a result of the following activity: • Dispositions in 2023 and 2024 resulted in a decrease of $35.9 million. • Acquisitions and developments in 2023 and 2024 resulted in an increase of $0.8 million. • Increases in portfolio operating expenses as follows: ◦ Administrative, primarily leasing commissions, of $5.1 million; ◦ Utilities of $2.7 million; ◦ Property taxes of $1.9 million; ◦ Security expense of $0.3 million; and ◦ Janitorial expense of $0.2 million. • Decreases in portfolio operating expenses were due to maintenance and repair expenses of $1.3 million and compensation expense of $0.8 million. 38 General and administrative expenses increased approximately $24.7 million, or 42.3%, from the prior year primarily as a result of the following activity: • Increase in restructuring and severance-related charges of $28.3 million • Decrease in payroll and payroll related expenses of approximately $2.4 million. • Increase in cash compensation expense of $1.4 million. • Increase in non-cash compensation incentive expense of $0.9 million. • Other decreases including travel, legal and other administrative costs of $3.5 million. There were no merger-related costs for the year ended December 31, 2024. Merger-related costs for the year ended December 31, 2023, included legal and consulting fees, which were offset by a refund related to state transfer taxes. Depreciation and amortization expense decreased $55.6 million, or 7.6%, from the prior year primarily as a result of the following activity: • Dispositions in 2023 and 2024 resulted in a decrease of $56.6 million. • Acquisitions and developments in 2023 and 2024 resulted in an increase of $0.9 million. • Various building and tenant improvement expenditures resulted in an increase of $39.0 million. • Assets that became fully depreciated resulted in a decrease of $38.9 million. Other Income (Expense) Other income (expense), as an expense increased $361.2 million, or 107.4%, from the prior year mainly due to the following activity: Gain on Sales of Real Estate Properties Gains on the sale of real estate properties and other assets for the years ended December 31, 2024 and 2023 totaled $109.8 million and $77.5 million, respectively. Interest Expense Interest expense decreased $16.2 million for the year ended December 31, 2024 compared to the prior year. The components of interest expense are as fol lows: CHANGE Dollars in thousands 2024 2023 $ % Contractual interest $ 196,392 $ 208,305 $ (11,913) (5.7) % Net discount/premium accretion 41,050 38,941 2,109 5.4 % Debt issuance costs amortization 4,769 5,588 (819) (14.7) % Amortization of interest rate swap settlement 168 168 — — % Amortization of treasury hedge settlement 427 427 — — % Fair value derivative 187 4,412 (4,225) (95.8) % Interest cost capitalization (4,295) (2,961) (1,334) 45.1 % Interest on lease liabilities 3,727 3,704 23 0.6 % Total interest expense $ 242,425 $ 258,584 $ (16,159) (6.2) % Contractual interest decreased $11.9 million, or 5.7%, primarily as a result of the following activity: • The Unsecured Term Loans accounted for an decrease of approximately $4.8 million, primarily due to the repayment of the $350 million Unsecured Term Loan, due 2025. • The Unsecured Credit Facility accounted for a decrease of approximately $11.4 million . • Active interest rate derivatives account ed for a decrease of $2.5 million, while expired interest rate derivatives accounted for an increase of $8.2 million. • Mortgage note repayments, net of assumptions, accounted for a decrease of approximately $1.4 million. 39 Impairment of Real Estate Assets and Credit Loss Reserves Impairment of real estate assets in 2024 totaling approximately $249.9 million is associated with completed or planned disposition activity. Additionally, the Company recorded $59.5 million of credit loss reserves on its mortgage note receivables and a $4.1 million fair value adjustment for an equity investment in other assets. Impairment of real estate assets in 2023 totaling approximately $149.7 million is associated with completed or planned disposition activity. Additionally, the Company recorded $5.2 million of credit loss reserves on its mortgage notes receivable. Impairment of Goodwill During the first quarter of 2024, the Company determined that the carrying value of 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 income (loss) from unconsolidated joint ventures The Company recognizes its proportionate share of losses from its unconsolidated joint ventures. The losses are primarily attributable to non-cash depreciation expense. See Note 5 for more details regarding the Company's unconsolidated joint ventures. Year Ended December 31, 2023 Compared to Year Ended December 31, 2022 The Company's discussion regarding the comparison of the year ended December 31, 2023 compared to the year ended December 31, 2022 was previously disclosed beginning on page 37 of the Company's Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on February 16, 2024, and is incorporated herein by reference. Non-GAAP Financial Measures and Key Performance Indicators Management considers certain non-GAAP financial measures and key performance indicators to be useful supplemental measures of the Company's operating performance. A non-GAAP financial measure is generally defined as one that purports to measure financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable measure determined in accordance with GAAP. Set forth below are descriptions of the non-GAAP financial measures management considers relevant to the Company's business and useful to investors, as well as reconciliations of these measures to the most directly comparable GAAP financial measures. The non-GAAP financial measures and key performance indicators presented herein are not necessarily identical to those presented by other real estate companies due to the fact that not all real estate companies use the same definitions. These measures should not be considered as alternatives to net income, as indicators of the Company's financial performance, or as alternatives to cash flow from operating activities as measures of the Company's liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of the Company's needs. Management believes that in order to facilitate a clear understanding of the Company's historical consolidated operating results, these measures should be examined in conjunction with net income and cash flows from operations as presented in the Consolidated Financial Statements and other financial data included elsewhere in this Annual Report on Form 10-K. Funds from Operations ("FFO"), Normalized FFO and Funds Available for Distribution ("FAD") FFO and FFO per share are operating performance measures adopted by the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as the most commonly accepted and reported measure of a REIT’s operating performance equal to “net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization, impairment, and after adjustments for unconsolidated partnerships and joint ventures.” In addition to FFO, the Company presents Normalized FFO and FAD. Normalized FFO is presented by adding to FFO acquisition-related costs, acceleration of debt issuance costs, debt extinguishment costs and other Company-defined normalizing items to evaluate operating performance. FAD is presented by adding to Normalized FFO non-real estate depreciation and amortization, deferred financing fees amortization, share-based compensation expense 40 and provision for bad debts, net; and subtracting straight-line rent income, net of expense, and maintenance capital expenditures, including second generation tenant improvements, capital expenditures and leasing commissions paid. The Company's definition of these terms may not be comparable to that of other real estate companies as they may have different methodologies for computing these amounts. FFO, Normalized FFO, and FAD should not be considered as an alternative to net income as an indicator of the Company's financial performance or to cash flow from operating activities as an indicator of the Company's liquidity. FFO, Normalized FFO, and FAD should be reviewed in connection with GAAP financial measures. Management believes FFO, Normalized FFO, FFO per share, Normalized FFO per share and FAD ("Non-GAAP Measures") provide an understanding of the operating performance of the Company’s properties without giving effect to certain significant non-cash items, primarily gains on sales of real estate, impairments and depreciation and amortization expense. Historical cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time. However, real estate values instead have historically risen or fallen with market conditions. The Company believes that by excluding the effect of depreciation, amortization, impairments and gains or losses from sales of real estate, all of which are based on historical costs, and which may be of limited relevance in evaluating current performance, Non-GAAP Measures can facilitate comparisons of operating performance between periods. The Company reports Non-GAAP Measures because these measures are observed by management to also be the predominant measures used by the REIT industry and by industry analysts to evaluate REITs. For these reasons, management deems it appropriate to disclose and discuss these Non-GAAP Measures. However, none of these measures represent cash generated from operating activities determined in accordance with GAAP and are not necessarily indicative of cash available to fund cash needs. Further, these measures should not be considered as an 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. 41 The table below reconciles net income attributable to common stockholders to FFO, Normalized FFO and FAD attributable to common stockholders for the years ended December 31, 2024, 2023, and 2022. YEAR ENDED DECEMBER 31, Amounts in thousands, except per share data 2024 2023 2022 Net (loss) income attributable to common stockholders $ (654,485) $ (278,261) $ 40,897 Net (loss) income attributable to common stockholders per diluted share 1 $ (1.81) $ (0.74) $ 0.15 Gain on sales of real estate assets (104,684) (77,546) (270,271) Impairment of real estate properties 249,909 149,717 54,427 Real estate depreciation and amortization 690,988 738,526 459,211 Non-controlling loss from operating partnership units (9,149) (3,426) (5) Unconsolidated JV depreciation and amortization 20,678 18,116 12,722 FFO adjustments $ 847,742 $ 825,387 $ 256,084 FFO adjustments per common share - diluted $ 2.29 $ 2.15 $ 1.01 FFO attributable to common stockholders $ 193,257 $ 547,126 $ 296,981 FFO attributable to common stockholders per common share - diluted $ 0.52 $ 1.43 $ 1.17 — Transaction costs 3,122 2,026 3,229 Merger-related costs 2 — (1,952) 103,380 Lease intangible amortization (2,054) 860 1,028 Non-routine legal costs/forfeited earnest money received 1,077 175 771 Debt financing costs 237 (62) 3,145 Restructuring and severance-related charges 29,852 1,445 — Credit losses and gains (losses) on other assets, net 3 59,707 8,599 — Impairment of goodwill 250,530 — — Merger-related fair value of debt instruments 40,667 42,885 21,248 Unconsolidated JV normalizing items 4 390 389 330 Normalized FFO adjustments $ 383,528 $ 54,365 $ 133,131 Normalized FFO adjustments per common share - diluted $ 1.04 $ 0.14 $ 0.52 Normalized FFO attributable to common stockholders $ 576,785 $ 601,491 $ 430,112 Normalized FFO attributable to common stockholders per common share - diluted $ 1.56 $ 1.57 $ 1.69 Non-real estate depreciation and amortization 1,478 2,566 2,217 Non-cash interest amortization, net 5 5,101 4,968 5,129 Rent reserves, net 714 3,163 516 Straight-line rent, net (27,254) (32,592) (20,124) Stock-based compensation 14,036 13,791 14,294 Unconsolidated JV non-cash items 6 (923) (1,034) (1,206) Normalized FFO adjusted for non-cash items $ 569,937 $ 592,353 $ 430,938 2nd generation tenant improvements (69,445) (66,081) (33,620) Leasing commissions paid (47,450) (36,391) (22,929) Building capital (33,934) (49,343) (48,913) FAD $ 419,108 $ 440,538 $ 325,476 FFO weighted average common shares outstanding - diluted 7 369,767 383,381 254,622 1 Potential common shares are not included in diluted earnings per share when a loss exists as the effect would be antidilutive. 2 Includes costs incurred related to the Merger. For the year ended December 31, 2023, Merger-related costs are net of a refund of $17.8 million for transfer taxes paid during the year ended December 31, 2022. 3 For the year ended December 31, 2024, includes $59.6 million in credit loss reserves, net of recoveries on four notes receivable included in "Impairment of real estate properties and credit loss reserves" on the Statement of Operations, $5.1 million gain on sale of other assets included in "Gains on sales of real estate and other assets" on the Statement of Operations, $4.1 million loss on other asset included in "Impairment of real estate properties and credit loss reserves" on the Statement of Operations, and a $1.1 million straight line rent reversal included in "Rental income" on the Statement of Operations. For the year ended December 31, 2023, includes a $5.2 million credit allowance for a mezzanine loan included in "Impairment of real estate properties 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 Includes the Company's proportionate share of lease intangible amortization related to unconsolidated joint ventures. 5 Includes the amortization of deferred financing costs, discounts and premiums, and non-cash financing receivable amortization. 6 Includes the Company's proportionate share of straight-line rent, net related to unconsolidated joint ventures. 42 7 The Company utilizes the treasury stock method which includes the dilutive effect of nonvested share-based awards outstanding of 556,201, 397,168, and 748,385 for the years ended December 31, 2024, 2023, and 2022, respectively. 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. The Company defines Cash NOI as rental income, interest from financing receivables less property operating expenses. Cash NOI excludes non-cash items such as above and below market lease intangibles, straight-line rent, lease inducements, financing receivable amortization, tenant improvement amortization and leasing commission amortization. The Company also excludes cash lease termination fees. Cash NOI is historical and not necessarily indicative of future results. 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. 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 same store pool once the Company has owned the property for eight full quarters. Newly-developed or redeveloped properties will be included in the same store pool eight full quarters after substantial completion. The following table reflects the Company's Same Store Cash NOI for the years ended December 31, 2024 and 2023. NUMBER OF PROPERTIES GROSS INVESTMENT at December 31, 2024 SAME STORE CASH NOI for the year ended December 31 Dollars in thousands 2024 2023 Same store properties 556 $ 10,810,884 $ 670,867 $ 652,420 Joint venture same store properties 29 $ 322,639 $ 17,595 $ 16,869 The following tables reconcile net loss to Same Store NOI and the same store property metrics to the total owned real estate portfolio for the years ended December 31, 2024 and 2023: Reconciliation of Same Store Cash NOI 43 SAME STORE RECONCILIATION YEAR ENDED DECEMBER 31, Dollars in thousands 2024 2023 Net loss $ (663,904) $ (282,083) Other expense 697,381 336,227 General and administrative expense 83,121 58,405 Depreciation and amortization expense 675,152 730,709 Other expenses 1 23,446 13,413 Straight-line rent, net (26,115) (32,592) Joint venture properties 24,219 19,176 Other revenue 2 (31,967) (17,249) Cash NOI 781,333 826,006 Cash NOI not included in same store (92,871) (156,717) Same store cash NOI 688,462 669,289 Same store joint venture properties (17,595) (16,869) Same store cash NOI (excluding JVs) $ 670,867 $ 652,420 1. 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. 2. Includes management fee income, interest, above and below market lease intangible amortization, lease inducement amortization, lease terminations and tenant improvement overage amortization. Reconciliation of Same Store Properties AS OF DECEMBER 31, 2024 Dollars and square feet in thousands PROPERTY COUNT GROSS INVESTMENT 1 SQUARE FEET OCCUPANCY Same store properties 556 $ 10,810,884 31,850 89.8 % Joint venture same store properties 29 322,639 1,636 89.2 % Wholly owned and joint venture acquisitions 33 172,330 2,388 94.3 % Wholly owned and joint venture development completions 5 191,113 553 57.7 % Wholly owned and joint venture redevelopments 25 545,331 1,874 63.0 % Planned Dispositions 3 50,245 144 58.3 % Total 651 $ 12,092,542 38,445 88.2 % Joint venture properties 65 556,897 4,253 87.4 % Total wholly-owned real estate properties 586 $ 11,535,645 34,192 88.3 % 1 Excludes assets held for sale, construction in progress, land held for development, corporate property and financing lease right-of-use assets unrelated to an imputed lease arrangement as a result of a sale leaseback transaction. Application of Critical Accounting Policies to Accounting Estimates The Company’s Consolidated Financial Statements are prepared in accordance with GAAP and the rules and regulations of the SEC. In preparing the Consolidated Financial Statements, management is required to exercise judgment and make assumptions that impact the carrying amount of assets and liabilities and the reported amounts of revenues and expenses reflected in the Consolidated Financial Statements. Management routinely evaluates the estimates and assumptions used in the preparation of its Consolidated Financial Statements. These regular evaluations consider historical experience and other reasonable factors and use the seasoned judgment of management personnel. Management has reviewed the Company’s critical accounting policies with the Audit Committee of the Board of Directors. Management believes the following paragraphs in this section describe the application of critical accounting policies and estimates by management to arrive at the critical accounting estimates reflected in the Consolidated Financial 44 Statements. The Company’s accounting policies are more fully discussed in Note 1 to the Consolidated Financial Statements. Principles of Consolidation The Company’s Consolidated Financial Statements include the accounts of the Company, its wholly owned subsidiaries, joint ventures, and partnerships where the Company controls the operating activities. All material intercompany accounts and transactions have been eliminated. Capitalization of Costs GAAP generally allows for the capitalization of various types of costs. The rules and regulations on capitalizing costs and the subsequent depreciation or amortization of those costs versus expensing them in the period incurred vary depending on the type of costs and the reason for capitalizing the costs. Direct costs of a development project generally include construction costs, professional services such as architectural and legal costs, travel expenses, and land acquisition costs as well as other types of fees and expenses. These costs are capitalized as part of the basis of an asset to which such costs relate. Indirect costs include capitalized interest and overhead costs. Indirect costs are capitalized during construction and on the unoccupied space in a property for up to one year after the property is ready for its intended use. Capitalized interest is calculated using the weighted average interest rate of the Company's unsecured debt or the interest rate on project specific debt, if applicable. The Company’s overhead costs are based on overhead load factors that are charged to a project based on direct time incurred. The Company computes the overhead load factors annually for its acquisition and development departments, which have employees who are involved in the projects. The overhead load factors are computed to absorb that portion of indirect employee costs (payroll and benefits, training, and similar costs) that are attributable to the productive time the employee incurs working directly on projects. The employees in the Company’s development departments who work on these projects maintain and report their hours, by project. Employee costs that are administrative, such as vacation time, sick time, or general and administrative time, are expensed in the period incurred. Acquisition-related costs include finder’s fees, advisory, legal, accounting, valuation, other professional or consulting fees, and certain general and administrative costs. Acquisition-related costs are expensed in the period incurred for acquisitions accounted for as a business combination under Accounting Standards Codification Topic 805, Business Combinations . These costs associated with asset acquisitions are capitalized in accordance with GAAP. Management’s judgment is also exercised in determining whether costs that have been previously capitalized to a project should be reserved for or written off if or when the project is abandoned or circumstances otherwise change that would call the project’s viability into question. The Company follows a standard and consistently applied policy of classifying pursuit activity as well as reserving for these types of costs based on their classification. The Company classifies its pursuit projects into two categories relating to development. The first category includes pursuits of developments that have a remote chance of producing new business. Costs for these projects are expensed in the period incurred. The second category includes those pursuits of developments that are either probable or highly probable to result in a project or contract. Since the Company believes it is probable that these pursuits will result in a project or contract, it capitalizes these costs in full and records no reserve. Each quarter, all capitalized pursuit costs are again reviewed for viability or a change in classification, and a management decision is made as to whether any additional reserve is deemed necessary. If necessary and considered appropriate, management would record an additional reserve at that time. Capitalized pursuit costs, net of the reserve, are carried in other assets in the Company’s Consolidated Balance Sheets, and any reserve recorded is charged to acquisition and pursuit costs on the Consolidated Statements of Operations. All pursuit costs will ultimately be written off to expense or capitalized as part of the constructed real estate asset. As of December 31, 2024 and 2023, the Company's Consolidated Balance Sheets include capitalized pursuit costs relating to potential developments totaling $4.9 million and $6.2 million, respectively. The Company expensed costs related to the pursuit of acquisitions and dispositions totaling $1.7 million, $0.8 million and $1.0 million for the years ended December 31, 2024, 2023 and 2022, respectively. In addition, the Company expensed costs related to the 45 pursuit of developments totaling $1.1 million, $0.8 million, and $2.2 million for the years ended December 31, 2024, 2023 and 2022, respectively. Valuation of Long-Lived Assets Held and Used, Unconsolidated Joint Ventures, Intangible Assets and Goodwill Long-Lived Assets Held and Used The Company assesses the potential for impairment of identifiable intangible assets and long-lived assets, primarily real estate properties, whenever events occur or a change in circumstances indicates that the carrying value might not be recoverable. Important factors that could cause management to review for impairment 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 useful 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 operators. In addition, the Company reviews for possible impairment of those assets subject to purchase options and those impacted by casualties, such as tornadoes and hurricanes. In addition, at least annually, the Company assesses whether there were indicators, including property operating performance, changes in anticipated holding period and general market conditions, that the value of the Company’s investments, including unconsolidated joint ventures, may have been impaired. The investment’s value would have been impaired only if management’s estimate of the fair value of the Company’s investment was less than its carrying value. To the extent impairment had occurred, a loss would have been recognized for the excess of its carrying amount over its fair value. The Company may, from time to time, be approached by a third party with an interest in purchasing one or more of the Company's operating real estate properties that were otherwise not for sale. Alternatively, the Company may explore disposing of an operating real estate property but without specific intent to sell the property and without the property meeting the criteria to be classified as held for sale (see discussion below). In such cases, the Company and a potential buyer typically negotiate a letter of intent followed by a purchase and sale agreement that includes a due diligence timeline for completion of customary due diligence procedures. Anytime throughout this period the transaction could be terminated by the parties. The Company views the execution of a purchase and sale agreement as a circumstance that warrants an impairment assessment and must include its best estimates of the impact of a potential sale in the recoverability test discussed in more detail below. A property value is considered impaired only if management's estimate of current and projected (undiscounted and unleveraged) operating cash flows of the property is less than the net carrying value of the property. These estimates of future cash flows include only those that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the property based on its estimated remaining useful life. These estimates, including the useful life determination which can be affected by any potential sale of the property, are based on management's assumptions about its use of the property. Therefore, significant judgment is involved in estimating the current and projected cash flows. When the Company executes a purchase and sale agreement for a held and used property, the Company performs the cash flow estimation described above. This assessment gives consideration to all available information, including an assessment of the likelihood the potential transaction will be consummated under the terms and conditions set forth in the purchase and sale agreement. Management will re-evaluate the recoverability of the property if and when significant changes occur as the transaction proceeds toward closing. Normally sale transactions will close within 15 to 30 days after the due diligence period expires. Upon expiration of the due diligence period, management will again re-evaluate the recoverability of the property, updating its assessment based on the status of the potential sale. Whenever management determines that the carrying value of an asset that has been tested may not be recoverable, then an impairment charge would be recognized to the extent the current carrying value exceeds the current fair value of the asset. Significant judgment is also involved in making a determination of the estimated fair value of the asset. The Company also performs an annual goodwill impairment review. The Company's reviews are typically performed as of December 31 of each year. However, during the first quarter of 2024, the Company experienced a sustained decline in the price per share of its common stock, which was identified as an indicator of goodwill impairment. As a 46 result, a goodwill evaluation was performed. As of the measurement date, the Company's current operations are carried out through a single reporting unit that had a carrying value of approximately $12.0 billion. The Company determined that the carrying value exceeded estimated fair value and therefore an impairment of goodwill was recorded. The Company 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. In 2023, a review indicated that no impairment had occurred with respect to the Company's goodwill asset of $250.5 million. Long-Lived Assets to be Disposed of by Planned Sale From time-to-time management affirmatively decides to sell certain real estate properties under a plan of sale. The Company reclassifies the property or disposal group as held for sale when all the following criteria for a qualifying plan of sale are met: • Management, having the authority to approve the action, commits to a plan to sell the property or disposal group; • The property or disposal group is available for immediate sale (i.e., a seller currently has the intent and ability to transfer the property or disposal group to a buyer) in its present condition, subject only to conditions that are usual and customary for sales of such properties or disposal groups; • An active program to locate a buyer and other actions required to complete the plan to sell have been initiated; • The sale of the property or disposal group is probable (i.e., likely to occur) and the transfer is expected to qualify for recognition as a completed sale within one year, with certain exceptions; • The property or disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and • Actions necessary to complete the plan indicate that it is unlikely significant changes to the plan will be made or that the plan will be withdrawn. A property or disposal group classified as held for sale is initially measured at the lower of its carrying amount or fair value less estimated costs to sell. An impairment charge is recognized for any initial adjustment of the property's or disposal group's carrying amount to its fair value less estimated costs to sell in the period the held for sale criteria are met. The fair value less estimated costs to sell the property (disposal group) should be assessed each reporting period it remains classified as held for sale. Depreciation ceases as long as a property is classified as held for sale. If circumstances arise that were previously considered unlikely and a subsequent decision not to sell a property classified as held for sale were to occur, the property is reclassified as held and used. The property is measured at the time of reclassification at the lower of its (a) carrying amount before it was classified as held for sale, adjusted for any depreciation expense or impairment losses that would have been recognized had the property been continuously classified as held and used or (b) fair value at the date of the subsequent decision not to sell. The effect of any required adjustment is reflected in income from continuing operations at the date of the decision not to sell. The Company recorded impairment charges totaling $249.9 million for the year ended December 31, 2024 related to real estate properties and other long-lived assets. The impairment charges related to 51 properties sold and 13 additional properties associated with planned disposition activity in 2025. The Company recorded impairment charges of $149.7 million in 2023. Valuation of Asset Acquisitions As described in more detail in Note 1 to the Consolidated Financial Statements, when the Company acquires real estate properties with in-place leases, the cost of the acquisition must be allocated between the acquired tangible real estate assets “as if vacant” and any acquired intangible assets. Such intangible assets could include above- (or below-) market in-place leases and at-market in-place leases, which could include the opportunity costs associated with absorption period rentals, direct costs associated with obtaining new leases such as tenant improvements, leasing commissions and customer relationship assets. With regard to the elements of estimating the “as if vacant” values of the property and the intangible assets, including the absorption period, occupancy increases during the absorption period, tenant improvement amounts, and leasing commission percentages, the Company uses the same absorption period and occupancy assumptions for similar property types. Any remaining excess purchase price is then allocated 47 to the tangible and intangible assets based on their relative fair values. The identifiable tangible and intangible assets are then subject to depreciation and amortization. Depreciation of Real Estate Assets and Amortization of Related Intangible Assets As of December 31, 2024, the Company had gross investments of approximately $10.5 billion in depreciable real estate assets and related intangible assets. When real estate assets and related intangible assets are acquired or placed in service, they must be depreciated or amortized. Management’s judgment involves determining which depreciation method to use, estimating the economic life of the building and improvement components of real estate assets, and estimating the value of intangible assets acquired when real estate assets are purchased that have in-place leases. With respect to the building components, there are several depreciation methods available under GAAP. Some methods record relatively more depreciation expense on an asset in the early years of the asset’s economic life, and relatively less depreciation expense on the asset in the later years of its economic life. The straight-line method of depreciating real estate assets is the method the Company follows because, in the opinion of management, it is the method that most accurately and consistently allocates the cost of the asset over its estimated life. The Company assigns a useful life to its owned properties based on many factors, including the age and condition of the property when acquired. Revenue Recognition The Company's primary source of revenue is rental income derived from non-cancelable leases. When a lease is executed, the terms and conditions of the lease are assessed to determine the appropriate accounting classification. As of December 31, 2024, with the exception of one finance lease, all of the Company's leases, where the Company is the lessor, are classified as operating leases. Operating leases are recognized on the straight-line basis over the term of the related lease, including periods where a tenant is provided a rent concession. Operating expense recoveries, which include reimbursements for building specific operating expenses, are recognized as revenue in the period in which the related expenses are incurred. The Company generally expects that collectability is probable at lease commencement. If the assessment of collectability changes after the lease commencement date and Rental income is not considered probable, Rental income is recognized on a cash basis and all previously recognized uncollectible Rental income is reversed in the period in which it is determined not to be probable of collection. In addition to the lease-specific collectability assessment performed under Topic 842, the Company may also apply a general reserve ("provision for bad debt"), as a reduction to Rental income, for its portfolio of operating lease receivables. The Company also recognizes certain revenue based on the guidance in Topic 606 and is based on the five-step model to account for revenue arising from contracts with customers. The Company's primary source of revenue associated with Topic 606 relates to parking revenue and management fee income. Derivative Instruments Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the derivative instrument with the recognition of the changes in the fair-value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transaction in a cash flow hedge. The accounting for a derivative requires that the Company make judgments in determining the nature of the derivatives and their effectiveness, including ones regarding the likelihood that a forecasted transaction will take place. These judgments could materially affect our consolidated financial statements. The Company may enter into a derivative instrument to manage interest rate risk from time to time. When a derivative instrument is initiated, the Company will assess its intended use of the derivative instrument and may elect a hedging relationship and apply hedge accounting. As required by the accounting literature, the Company will formally document the hedging relationship for all derivative instruments prior to or contemporaneous with entering into the derivative instrument. 48