SEC Form 10-Q filed by Healthcare Realty Trust Incorporated
$HR
Real Estate Investment Trusts
Real Estate
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
(Mark One) | ||||||||
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
| For the quarterly period ended: | ||||||||
OR | ||||||||
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to | ||||||||
Commission File Number: 001-35568 (Healthcare Realty Trust Incorporated)
(Exact name of Registrant as specified in its charter)
| (State or other jurisdiction of Incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices)
(615 ) 269-8175
(Registrant's telephone number, including area code)
www.healthcarerealty.com | ||
| (Internet address) | ||
Securities Registered Pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||||||||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
| ☒ | ☐ | No | |||||||||
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
| ☒ | ☐ | No | |||||||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | ☐ | Accelerated filer | ☐ | Non-accelerated filer | |||||||||||||
| Smaller reporting company | Emerging growth company | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
| ☐ | ||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| Yes | ☒ | No | |||||||||
As of October 25, 2024, the Registrant had 354,388,216 shares of Common Stock outstanding.
HEALTHCARE REALTY TRUST INCORPORATED
FORM 10-Q
September 30, 2024
Table of Contents
| PART I - FINANCIAL INFORMATION | ||||||||
| PART II - OTHER INFORMATION | ||||||||
| Item 5 | Other Information | |||||||
| SIGNATURE | ||||||||
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Healthcare Realty Trust Incorporated
Condensed Consolidated Balance Sheets
Amounts in thousands, except per share data
| ASSETS | ||||||||
Unaudited SEPTEMBER 30, 2024 | DECEMBER 31, 2023 | |||||||
| Real estate properties | ||||||||
| Land | $ | $ | ||||||
| Buildings and improvements | ||||||||
| Lease intangibles | ||||||||
| Personal property | ||||||||
| Investment in financing receivable, net | ||||||||
| Financing lease right-of-use assets | ||||||||
| Construction in progress | ||||||||
| Land held for development | ||||||||
| Total real estate properties | ||||||||
| Less accumulated depreciation and amortization | ( | ( | ||||||
| Total real estate properties, net | ||||||||
| Cash and cash equivalents | ||||||||
| Assets held for sale, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Investments in unconsolidated joint ventures | ||||||||
| Goodwill | ||||||||
| Other assets, net | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Liabilities | ||||||||
| Notes and bonds payable | $ | $ | ||||||
| Accounts payable and accrued liabilities | ||||||||
| Liabilities of assets held for sale | ||||||||
| Operating lease liabilities | ||||||||
| Financing lease liabilities | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Redeemable non-controlling interests | ||||||||
| Stockholders' equity | ||||||||
Preferred stock, $ | ||||||||
Class A Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ( | ( | ||||||
| Cumulative net income attributable to common stockholders | ||||||||
| Cumulative dividends | ( | ( | ||||||
| Total stockholders' equity | ||||||||
| Non-controlling interest | ||||||||
| Total equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, are an integral part of these financial statements.
1
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2024 and 2023
Amounts in thousands, except per share data
Unaudited
| THREE MONTHS ENDED September 30, | NINE MONTHS ENDED September 30, | |||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||
| Revenues | ||||||||||||||
| Rental income | $ | $ | $ | $ | ||||||||||
| Interest income | ||||||||||||||
| Expenses | ||||||||||||||
| Property operating | ||||||||||||||
| General and administrative | ||||||||||||||
| Transaction costs | ||||||||||||||
| Merger-related costs | ( | |||||||||||||
| Depreciation and amortization | ||||||||||||||
| Other income (expense) | ||||||||||||||
| Gain on sales of real estate properties and other assets | ||||||||||||||
| Interest expense | ( | ( | ( | ( | ||||||||||
| Gain on extinguishment of debt | ||||||||||||||
| Impairment of real estate properties and credit loss reserves | ( | ( | ( | ( | ||||||||||
| Impairment of goodwill | ( | |||||||||||||
| Equity income (loss) from unconsolidated joint ventures | ( | ( | ( | |||||||||||
| Interest and other (expense) income, net | ( | ( | ||||||||||||
| ( | ( | ( | ( | |||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
| Net loss attributable to non-controlling interests | ||||||||||||||
| Net loss attributable to common stockholders | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
| Basic earnings per common share | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
| Diluted earnings per common share | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
| Weighted average common shares outstanding - basic | ||||||||||||||
| Weighted average common shares outstanding - diluted | ||||||||||||||
The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, are an integral part of these financial statements.
2
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Comprehensive Loss
For the Three and Nine Months Ended September 30, 2024 and 2023
Amounts in thousands
Unaudited
| THREE MONTHS ENDED September 30, | NINE MONTHS ENDED September 30, | |||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
| Other comprehensive income (loss) | ||||||||||||||
| Interest rate derivatives | ||||||||||||||
| Reclassification adjustments for gains included in interest expense | ( | ( | ( | ( | ||||||||||
| (Losses) gains arising during the period on interest rate swaps | ( | |||||||||||||
| ( | ( | |||||||||||||
| Comprehensive loss | ( | ( | ( | ( | ||||||||||
| Less: comprehensive loss attributable to non-controlling interests | ||||||||||||||
| Comprehensive loss attributable to common stockholders | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, are an integral part of these financial statements.
3
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Equity and Redeemable Non-Controlling Interests
For the Three Months Ended September 30, 2024 and 2023
Amounts in thousands, except per share data
Unaudited
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Cumulative Net Income | Cumulative Dividends | Total Stockholders’ Equity | Non-controlling Interests | Total Equity | Redeemable Non-controlling Interests | |||||||||||||||||||||
| Balance at June 30, 2024 | $ | $ | $ | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||
| Common stock repurchases | ( | ( | — | — | — | ( | — | ( | — | ||||||||||||||||||||
| Redemption of non-controlling interest | — | — | — | — | — | — | ( | ( | — | ||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | ( | ( | — | ||||||||||||||||||||
| Reclassification adjustments for gains included in net income (interest expense) | — | — | ( | — | — | ( | ( | ( | — | ||||||||||||||||||||
| Losses arising during the period on interest rate swaps | — | — | ( | — | — | ( | ( | ( | — | ||||||||||||||||||||
Dividends to common stockholders and distributions to non-controlling interest holders ($ | — | — | — | — | ( | ( | ( | ( | — | ||||||||||||||||||||
| Balance at September 30, 2024 | $ | $ | $ | ( | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Cumulative Net Income | Cumulative Dividends | Total Stockholders’ Equity | Non-controlling Interests | Total Equity | Redeemable Non-controlling Interests | |||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||
| Issuance of common stock, net of issuance costs | — | — | — | — | — | — | |||||||||||||||||||||||
| Common stock redemptions | — | — | — | — | — | — | |||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | ||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | ( | ( | — | ||||||||||||||||||||
| Reclassification adjustments for gains included in net income (interest expense) | — | — | ( | — | — | ( | ( | ( | — | ||||||||||||||||||||
| Gains arising during the period on interest rate swaps | — | — | — | — | — | ||||||||||||||||||||||||
| Contributions from redeemable non-controlling interests | — | — | — | — | — | — | — | — | |||||||||||||||||||||
| Adjustments to redemption value of redeemable non-controlling interests | — | — | — | — | — | — | — | — | ( | ||||||||||||||||||||
Dividends to common stockholders and distributions to non-controlling interest holders ($ | — | — | — | — | ( | ( | ( | ( | — | ||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, are an integral part of these financial statements.
4
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Equity and Redeemable Non-Controlling Interests
For the Nine Months Ended September 30, 2024 and 2023
Amounts in thousands, except per share data
Unaudited
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Cumulative Net Income | Cumulative Dividends | Total Stockholders’ Equity | Non-controlling Interests | Total Equity | Redeemable Non-controlling Interests | |||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | ( | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||
| Issuance of common stock, net of issuance costs | — | — | — | — | — | — | |||||||||||||||||||||||
| Common stock redemptions | — | ( | — | — | — | ( | — | ( | — | ||||||||||||||||||||
| Conversion of OP Units to common stock | — | — | — | ( | — | ||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | ||||||||||||||||||||||||
| Common stock repurchases | ( | ( | — | — | — | ( | — | ( | — | ||||||||||||||||||||
| Redemption of non-controlling interest | — | — | — | — | — | — | ( | ( | — | ||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | ( | ( | — | ||||||||||||||||||||
| Reclassification adjustments for gains included in net income (interest expense) | — | — | ( | — | — | ( | ( | ( | — | ||||||||||||||||||||
| Gains arising during the period on interest rate swaps | — | — | — | — | — | ||||||||||||||||||||||||
| Contributions from redeemable non-controlling interests | — | — | — | — | — | — | — | — | |||||||||||||||||||||
| Adjustments to redemption value of redeemable non-controlling interests | — | — | — | — | — | — | — | — | ( | ||||||||||||||||||||
Dividends to common stockholders and distributions to non-controlling interest holders ( | — | — | — | — | ( | ( | ( | ( | — | ||||||||||||||||||||
| Balance at September 30, 2024 | $ | $ | $ | ( | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Cumulative Net Income | Cumulative Dividends | Total Stockholders’ Equity | Non-controlling Interests | Total Equity | Redeemable Non-controlling Interests | |||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||
| Issuance of common stock, net of issuance costs | — | — | — | — | — | — | |||||||||||||||||||||||
| Common stock redemptions | — | ( | — | — | — | ( | — | ( | — | ||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | ||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | ( | ( | — | ||||||||||||||||||||
| Reclassification adjustments for gains included in net income (interest expense) | — | — | ( | — | — | ( | ( | ( | — | ||||||||||||||||||||
| Gains arising during the period on interest rate swaps | — | — | — | — | — | ||||||||||||||||||||||||
| Contributions from redeemable non-controlling interests | — | — | — | — | — | — | — | — | |||||||||||||||||||||
| Adjustments to redemption value of redeemable non-controlling interests | — | — | — | — | — | — | — | — | ( | ||||||||||||||||||||
Dividends to common stockholders and distributions to non-controlling interest holders ( | — | — | — | — | ( | ( | ( | ( | — | ||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, are an integral part of these financial statements.
5
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2024 and 2023
Amounts in thousands
Unaudited
| OPERATING ACTIVITIES | ||||||||
| NINE MONTHS ENDED September 30, | ||||||||
| 2024 | 2023 | |||||||
| Net loss | $ | ( | $ | ( | ||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Other amortization | ||||||||
| Share-based compensation | ||||||||
| Amortization of straight-line rent receivable (lessor) | ( | ( | ||||||
| Amortization of straight-line rent on operating leases (lessee) | ||||||||
| Gain on sales of real estate properties and other assets | ( | ( | ||||||
| Gain on extinguishment of debt | ( | |||||||
| Impairment of real estate properties and credit loss reserves | ||||||||
| Impairment of goodwill | ||||||||
| Equity loss from unconsolidated joint ventures | ||||||||
| Distributions from unconsolidated joint ventures | ||||||||
| Non-cash interest from financing and notes receivable | ( | ( | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Other assets, including right-of-use-assets | ( | ( | ||||||
| Accounts payable and accrued liabilities | ( | ( | ||||||
| Other liabilities | ( | |||||||
| Net cash provided by operating activities | ||||||||
| INVESTING ACTIVITIES | ||||||||
| Acquisitions of real estate | ( | |||||||
| Development of real estate | ( | ( | ||||||
| Additional long-lived assets | ( | ( | ||||||
| Funding of mortgages and notes receivable | ( | ( | ||||||
| Investments in unconsolidated joint ventures | ( | |||||||
| Investment in financing receivable | ( | ( | ||||||
| Contributions from redeemable non-controlling interests | ||||||||
| Proceeds from sales of real estate properties and additional long-lived assets | ||||||||
| Proceeds from notes receivable repayments | ||||||||
| Net cash provided by investing activities | ||||||||
| FINANCING ACTIVITIES | ||||||||
| Net borrowings (repayments) on unsecured credit facility | ( | |||||||
| Repayment on term loan | ( | |||||||
| Repayments of notes and bonds payable | ( | ( | ||||||
| Dividends paid | ( | ( | ||||||
| Net proceeds from issuance of common stock | ||||||||
| Common stock redemptions | ( | ( | ||||||
| Common stock repurchases | ( | |||||||
| Distributions to non-controlling interest holders | ( | ( | ||||||
| Redemption of non-controlling interest | ( | |||||||
| Debt issuance and assumption costs | ( | ( | ||||||
| Payments made on finance leases | ( | ( | ||||||
| Net cash used in financing activities | ( | ( | ||||||
| Increase (decrease) in cash and cash equivalents | ( | |||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period, including assets held for sale | ||||||||
| Cash and cash equivalents held for sale | ( | |||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
6
| Supplemental Cash Flow Information | NINE MONTHS ENDED September 30, | |||||||
| 2024 | 2023 | |||||||
| Interest paid | $ | $ | ||||||
| Mortgage notes receivable taken in connection with sale of real estate | $ | $ | ||||||
| Invoices accrued for construction, tenant improvements and other capitalized costs | $ | $ | ||||||
| Mortgage note payable assumed in connection with acquisition of real estate, net | $ | $ | ||||||
| Capitalized interest | $ | $ | ||||||
| Contribution of real estate properties into unconsolidated joint venture | $ | $ | ||||||
The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, are an integral part of these financial statements.
7
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Business Overview
Healthcare Realty Trust Incorporated (the "Company") is a real estate investment trust ("REIT") that owns, leases, manages, acquires, finances, develops and redevelops income-producing real estate properties associated primarily with the delivery of outpatient healthcare services throughout the United States. As of September 30, 2024, the Company had gross investments of approximately $12.4 billion in 605 consolidated real estate properties, construction in progress, redevelopments, financing receivables, financing lease right-of-use assets, land held for development and corporate property, excluding held for sale assets. In addition, as of September 30, 2024, the Company had a weighted average ownership interest of approximately 33 % in 55 real estate properties held in unconsolidated joint ventures. See Note 2 below for more details regarding the Company's unconsolidated joint ventures. The Company's consolidated real estate properties are located in 34 states and total approximately 35.4 million square feet. The Company provided leasing and property management services to 92 % of its portfolio nationwide as of September 30, 2024.
On July 20, 2022, pursuant to that certain Agreement and Plan of Merger dated as of February 28, 2022, by and among Healthcare Realty Trust Incorporated, a Maryland corporation (now known as HRTI, LLC, a Maryland limited liability company) (“Legacy HR”), Healthcare Trust of America, Inc., a Maryland corporation (now known as Healthcare Realty Trust Incorporated) (“Legacy HTA”), Healthcare Trust of America Holdings, LP, a Delaware limited partnership (now known as Healthcare Realty Holdings, L.P.) (the “OP”), and HR Acquisition 2, LLC, a Maryland limited liability company (“Merger Sub”), Merger Sub merged with and into Legacy HR, with Legacy HR continuing as the surviving entity and a wholly-owned subsidiary of Legacy HTA (the “Merger”). The combined 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 under the ticker symbol “HR”.
The Company is structured as an umbrella partnership REIT under which substantially all of its business is conducted through the OP, the day-to-day management of which is exclusively controlled by the Company. As of September 30, 2024, the Company owned 98.5 % of the issued and outstanding units of the OP (“OP Units”), with other investors owning the remaining 1.5 % of the OP's issued and outstanding units.
Basis of Presentation
The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. All material intercompany transactions and balances have been eliminated in consolidation.
This interim financial information should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. Management believes that all adjustments of a normal, recurring nature considered necessary for a fair presentation have been included. In addition, the interim financial information does not necessarily represent or indicate what the operating results will be for the year ending December 31, 2024 for many reasons including, but not limited to, acquisitions, dispositions, capital financing transactions, changes in interest rates and the effects of other trends, risks and uncertainties.
Principles of Consolidation
The Company’s Condensed Consolidated Financial Statements include the accounts of the Company, its wholly owned subsidiaries, and joint ventures and partnerships where the Company controls the operating activities. GAAP requires us to identify entities for which control is achieved through means other than voting rights and to determine which business enterprise is the primary beneficiary of variable interest entities (“VIEs”). Accounting Standards Codification (“ASC”) Topic 810, Consolidation broadly defines a VIE as an entity in which either (i) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of such entity that most significantly impact such entity’s economic performance or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support. The Company identifies the
8
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
primary beneficiary of a VIE as the enterprise that has both of the following characteristics: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses or receive benefits of the VIE that could potentially be significant to the entity. The Company consolidates its investment in a VIE when it determines that it is the VIE’s primary beneficiary, with any minority interests reflected as non-controlling interests or redeemable non-controlling interests in the accompanying Condensed Consolidated Financial Statements.
The Company may change its original assessment of a VIE upon subsequent events, such as the modification of contractual arrangements that affect the characteristics or adequacy of the entity’s equity investments at risk, the disposition of all or a portion of an interest held by the primary beneficiary, or changes in facts and circumstances that impact the power to direct activities of the VIE that most significantly impacts economic performance. The Company performs this analysis on an ongoing basis.
For property holding entities not determined to be VIEs, the Company consolidates such entities in which it owns 100 % of the equity or has a controlling financial interest evidenced by ownership of a majority voting interest. All intercompany balances and transactions are eliminated in consolidation. For entities in which the Company owns less than 100 % of the equity interest, the Company consolidates the entity if it has the direct or indirect ability to control the entities’ activities based upon the terms of the respective entities’ ownership agreements.
As of September 30, 2024, the Company had four consolidated VIEs (including one held for sale), in addition to the OP, consisting of joint venture investments in which the Company is the primary beneficiary of the VIE based on the combination of operational control and the rights to receive residual returns or the obligation to absorb losses arising from the joint ventures. Accordingly, such joint ventures have been consolidated, and the table below summarizes the balance sheets of consolidated VIEs, excluding the OP, in the aggregate:
| (dollars in thousands) | September 30, 2024 | ||||
| Assets: | |||||
Total real estate properties, net | $ | ||||
| Cash and cash equivalents | |||||
Other assets, net | |||||
Assets held for sale, net | |||||
Total assets | $ | ||||
Liabilities: | |||||
Accrued expenses and other liabilities | $ | ||||
Liabilities held for sale, net | |||||
Total liabilities | $ | ||||
As of September 30, 2024, the Company had three unconsolidated VIEs consisting of two notes receivable and one joint venture. The Company does not have the power or economic interests to direct the activities of these VIEs on a stand-alone basis, and therefore it was determined that the Company was not the primary beneficiary. As a result, the Company accounts for the two notes receivable as amortized cost and a joint venture arrangement under the equity method.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
See below for additional information regarding the Company's unconsolidated VIEs.
| (dollars in thousands) ORIGINATION DATE | LOCATION | SOURCE | CARRYING AMOUNT | MAXIMUM EXPOSURE TO LOSS | ||||||||||
| 2021 | Houston, TX 1 | Notes receivable | $ | $ | ||||||||||
| 2021 | Charlotte, NC 1 | Notes receivable | ||||||||||||
| 2022 | Texas 2 | Joint venture | ||||||||||||
1Assumed mortgage notes receivable in connection with the Merger.
2Includes investments in seven properties.
Use of Estimates in the Condensed Consolidated Financial Statements
Redeemable Non-Controlling Interests
Asset Impairment
As of September 30, 2024, 11 real estate properties totaling $52.6 million were measured at fair value using level 3 fair value hierarchy. The level 3 fair value techniques included brokerage estimates, letters of intent, and unexecuted purchase and sale agreements, less estimated closing costs.
Goodwill Impairment
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Investments in Leases - Financing Receivables, Net
| (dollars in thousands) ORIGINATION DATE | LOCATION | INTEREST RATE | CARRYING VALUE as of SEPTEMBER 30, 2024 | ||||||||
| May 2021 | Poway, CA | $ | |||||||||
| November 2021 | Columbus, OH | ||||||||||
| $ | |||||||||||
Real Estate Notes Receivable
| (dollars in thousands) | ORIGINATION | MATURITY | STATED INTEREST RATE | MAXIMUM LOAN COMMITMENT | OUTSTANDING as of SEPTEMBER 30, 2024 | INTEREST RECEIVABLE (OTHER ASSETS) | ALLOWANCE FOR CREDIT LOSSES | FAIR VALUE DISCOUNT AND FEES | CARRYING VALUE as of SEPTEMBER 30, 2024 | ||||||||||||||||||||
| Mezzanine loans | |||||||||||||||||||||||||||||
| Texas | 6/24/2021 | 6/24/2024 | % | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||
| Arizona | 12/21/2023 | 12/20/2026 | % | ||||||||||||||||||||||||||
| ( | ( | ||||||||||||||||||||||||||||
| Mortgage loans | |||||||||||||||||||||||||||||
Texas 1 | 6/30/2021 | 12/02/2024 | % | ( | |||||||||||||||||||||||||
North Carolina 2 | 12/22/2021 | 12/22/2024 | % | ( | |||||||||||||||||||||||||
| Florida | 5/17/2022 | 2/27/2026 | % | ( | |||||||||||||||||||||||||
| California | 3/30/2023 | 3/29/2026 | % | ||||||||||||||||||||||||||
| Florida | 12/28/2023 | 12/28/2026 | % | ||||||||||||||||||||||||||
| ( | ( | ||||||||||||||||||||||||||||
| $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
1During the second quarter of 2024, the Company determined that an allowance for credit loss of $11.2 million was needed on this mortgage loan. The reserve amount consists of approximately $10.7 million of principal and approximately $0.5 million of interest. Additionally, the maturity date on this mortgage loan was extended to December 2, 2024.
2Outstanding principal and interest due upon maturity.
Allowance for Credit Losses
Pursuant to ASC Topic 326: Financial Instruments - Credit Losses, the Company adopted a policy to evaluate current expected credit losses at the inception of loans qualifying for treatment under ASC Topic 326. The Company utilizes a probability of default method approach for estimating current expected credit losses and evaluates the liquidity and creditworthiness of its borrowers on a quarterly basis to determine whether any updates to the future expected losses recognized upon inception are necessary. The Company’s evaluation considers industry and economic conditions, credit enhancements, liquidity, and other factors. The determination of the credit allowance is based on a quarterly evaluation of all outstanding loans, including general economic conditions and estimated collectability of loan payments. The Company evaluates the collectability of loan receivables based on a combination of credit quality indicators, including, but not limited to, payment status, historical loan charge-offs, financial strength of the borrower and guarantors, and nature, extent, and value of the underlying collateral. A loan is considered to have deteriorated credit quality when, based on current information and events, it is probable that the Company will be
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
unable to collect all amounts due as scheduled according to the contractual terms of the loan agreement. For those loans identified as having deteriorated credit quality, the amount of credit loss is determined on an individual basis. Placement on non-accrual status may be required. Consistent with this definition, all loans on non-accrual status are deemed to have deteriorated credit quality. To the extent circumstances improve and the risk of collectability is diminished, the loan may return to income accrual status. While a loan is on non-accrual status, any cash receipts are applied against the outstanding principal balance.
During the first quarter of 2023, the Company determined that the risk of credit loss on two of its mezzanine loans was no longer remote and recorded a credit loss reserve of $5.2 million. During the nine months ended September 30, 2024, the Company determined that an additional allowance of $46.8 million was needed on these two mezzanine loans. Additionally, during the nine months ended September 30, 2024 the Company determined the risk of credit loss on one of its mortgage notes receivable was no longer remote and recorded a credit loss reserve of $11.2 million, for a total of $58.0 million in total credit loss reserves year-to-date. The Company utilized the level 3 fair value hierarchy, which included a brokerage estimate on the underlying collateral of the mortgage loan, to determine the amount of credit loss reserve.
The following table summarizes the Company's allowance for credit losses on real estate notes receivable:
| Dollars in thousands | NINE MONTHS ENDED SEPTEMBER 30, 2024 | TWELVE MONTHS ENDED DECEMBER 31, 2023 | ||||||
| Allowance for credit losses, beginning of period | $ | $ | ||||||
| Credit loss reserves | ||||||||
| Allowance for credit losses, end of period | $ | $ | ||||||
Interest Income
Income from Lease Financing Receivables
The Company recognized the related income from two financing receivables totaling $2.1 million and $6.3 million, respectively, for the three and nine months ended September 30, 2024, and $2.0 million and $6.2 million, respectively, for the three and nine months ended September 30, 2023, based on an imputed interest rate over the terms of the applicable lease. As a result, the interest recognized from the financing receivable in any particular period will not equal the cash payments from the lease agreement in that period.
Acquisition costs incurred in connection with entering into the financing receivable are treated as loan origination fees. These costs are classified with the financing receivable and are included in the balance of the net investment. Amortization of these amounts will be recognized as a reduction to Interest income over the life of the lease.
Income from Real Estate Notes Receivable
The Company recognized interest income related to real estate notes receivable of $1.8 million and $6.0 million, respectively, for the three and nine months ended September 30, 2024, and $2.3 million and $6.5 million, respectively, for the three and nine months ended September 30, 2023. The Company recognizes interest income on an accrual basis unless the Company has determined that collectability of contractual amounts is not reasonably assured, at which point the note is placed on non-accrual status and interest income is recognized on a cash basis. In 2023, the Company placed two of its real estate notes receivable on non-accrual status and accordingly did not recognize any interest income for the three and nine month periods ended September 30, 2024. In the second quarter of 2024, the Company placed one of its real estate notes receivable with a principal balance, net of credit loss, of $20.5 million on non-accrual status.
Revenue from Contracts with Customers (ASC Topic 606)
The Company recognizes certain revenue under the core principle of ASC Topic 606. This topic requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Lease revenue is not within the scope of ASC Topic 606. To achieve the core principle, the Company applies the five-step model specified in the guidance.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
| THREE MONTHS ENDED September 30, | NINE MONTHS ENDED September 30, | |||||||||||||
| in thousands | 2024 | 2023 | 2024 | 2023 | ||||||||||
| Type of Revenue | ||||||||||||||
| Parking income | $ | $ | $ | $ | ||||||||||
Management fee income/other 1 | ||||||||||||||
| $ | $ | $ | $ | |||||||||||
The Company’s major types of revenue that are accounted for under Topic 606 that are listed above are all accounted for as the performance obligation is satisfied. The performance obligations that are identified for each of these items are satisfied over time, and the Company recognizes revenue monthly based on this principle.
New Accounting Pronouncements
On November 27, 2023, the Financial Accounting Standards Board ("FASB") issued ASU 2023-07, Segment Reporting (Topic 280). Some of the main provisions of this update to segment reporting include; (i) a requirement to disclose significant segment expenses, on an annual and interim basis, that are regularly provided to the chief operating decision maker ("CODM") and included within each reported measure of segment profit or loss; (ii) a requirement to disclose the title and position of the CODM and an explanation of how the CODM uses the reported measures of segment profit or loss in assessing segment performance and deciding how to allocate resources, and (iii) a requirement that an entity that has a single reportable segment provide all the disclosures required by the amendments in this update.
Note 2. Real Estate Investments
2024 Acquisition Activity
The Company had no real estate acquisition activity for the nine months ended September 30, 2024.
Unconsolidated Joint Ventures
The Company's investment in and income (losses) recognized for the three and nine months ended September 30, 2024 and 2023 related to its unconsolidated joint ventures accounted for under the equity method are shown in the table below:
| THREE MONTHS ENDED September 30, | NINE MONTHS ENDED September 30, | |||||||||||||
| Dollars in thousands | 2024 | 2023 | 2024 | 2023 | ||||||||||
| Investments in unconsolidated joint ventures, beginning of period | $ | $ | $ | $ | ||||||||||
New investment during the period 1 | ||||||||||||||
| Equity income (loss) recognized during the period | ( | ( | ( | |||||||||||
| Owner distributions | ( | ( | ( | ( | ||||||||||
| Investments in unconsolidated joint ventures, end of period | $ | $ | $ | $ | ||||||||||
1In the third quarter of 2024, the Company contributed seven properties into a new joint venture in which it retained a 20 % ownership interest. The Company also contributed four properties into a joint venture entered into in the second quarter of 2024, for a total of 15 properties, in which it
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
2024 Real Estate Asset Dispositions
The following table details the Company's dispositions and joint venture contributions for the nine months ended September 30, 2024.
| Dollars in thousands | DATE DISPOSED | SALE PRICE | CLOSING ADJUSTMENTS | NET PROCEEDS | NET REAL ESTATE INVESTMENT | OTHER (INCLUDING RECEIVABLES) | GAIN/(IMPAIRMENT) | SQUARE FOOTAGE | ||||||||||||||||||
| Albany, NY | 4/1/24 | $ | $ | ( | $ | $ | $ | ( | $ | ( | ||||||||||||||||
| San Angelo, TX | 4/12/24 | ( | ( | |||||||||||||||||||||||
| Houston, TX | 5/20/24 | ( | ( | |||||||||||||||||||||||
Multiple 1 | 5/23/24 | ( | ( | |||||||||||||||||||||||
| Denver, CO | 5/30/24 | ( | ( | |||||||||||||||||||||||
Austin, TX 1 | 6/6/24 | ( | ||||||||||||||||||||||||
| Minneapolis, MN | 6/21/24 | ( | ||||||||||||||||||||||||
Greensboro/Raleigh, NC 2 | 6/28/24 | ( | ||||||||||||||||||||||||
| Albany, NY | 8/2/24 | ( | ( | |||||||||||||||||||||||
| Charlotte, NC | 8/6/24 | ( | ||||||||||||||||||||||||
| Charleston, SC | 8/13/24 | ( | ||||||||||||||||||||||||
Multiple 1 | 8/23/24 | ( | ( | |||||||||||||||||||||||
Multiple 3 | 8/27/24 | ( | ( | |||||||||||||||||||||||
| Austin, TX | 9/13/24 | ( | ||||||||||||||||||||||||
| Raleigh, NC | 9/26/24 | ( | ||||||||||||||||||||||||
| Total dispositions | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||
1The Company contributed the following medical outpatient properties to a joint venture in which the Company retained 20 one two medical outpatient properties in Los Angeles, CA 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 $343.1 million.
2The Company sold seven medical outpatient properties in Greensboro, NC and two medical outpatient properties in Raleigh, NC to a single buyer in a single transaction.
3The Company contributed the following medical outpatient properties to a joint venture in which the Company retained 20 two one 148.9 million.
Subsequent to September 30, 2024, the Company disposed of the following properties, which were classified as held for sale as of September 30, 2024:
| Dollars in thousands | Date Disposed | Sale Price | Square Footage | ||||||||
Houston, TX 1 | 10/3/24 | $ | |||||||||
| Greensboro, NC | 10/9/24 | ||||||||||
| Des Moines, IA | 10/15/24 | ||||||||||
| Albany, NY | 10/15/24 | ||||||||||
Salt Lake City, UT 2 | 10/24/24 | ||||||||||
| Miami, FL | 10/25/24 | ||||||||||
| Miami, FL | 10/25/24 | ||||||||||
| Total | $ | $ | |||||||||
1.The Company provided seller financing of approximately $9.6 million in connection with this sale.
2.The Company sold a medical outpatient property that was included in a consolidated joint venture in which the Company held a 63 % ownership interest.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Assets Held for Sale
The Company had 10 properties classified as assets held for sale as of September 30, 2024, and one property classified as assets held for sale as of December 31, 2023. The table below reflects the assets and liabilities classified as held for sale as of September 30, 2024, and December 31, 2023:
| Dollars in thousands | September 30, 2024 | December 31, 2023 | ||||||||||||
| Balance Sheet data: | ||||||||||||||
| Land | $ | $ | ||||||||||||
| Building and improvements | ||||||||||||||
| Lease intangibles | ||||||||||||||
| Personal property | ||||||||||||||
| Land held for development | ||||||||||||||
| Accumulated depreciation | ( | ( | ||||||||||||
Real estate assets held for sale, net 1 | ||||||||||||||
| Cash and cash equivalents | ||||||||||||||
| Operating lease right-of-use assets | ||||||||||||||
| Other assets, net | ||||||||||||||
| Assets held for sale, net | $ | $ | ||||||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||||||||
| Operating lease liabilities | ||||||||||||||
| Other liabilities | ||||||||||||||
| Liabilities of assets held for sale | $ | $ | ||||||||||||
| Non-controlling interest held for sale | $ | $ | ||||||||||||
Note 3. Leases
Lessor Accounting
The Company’s properties generally are leased pursuant to non-cancelable, fixed-term operating leases with expiration dates through 2052. Some leases provide tenants with fixed rent renewal terms while others have market rent renewal terms. Some leases provide the lessee, during the term of the lease, with an option or right of first refusal to purchase the leased property. The Company’s single-tenant net leases generally require the lessee to pay minimum rent and all taxes (including property tax), insurance, maintenance and other operating costs associated with the leased property.
The Company's leases typically have escalators that are either based on a stated percentage or an index such as the Consumer Price Index ("CPI"). In addition, most of the Company's leases include non-lease components, such as reimbursement of operating expenses as additional rent, or include the reimbursement of expected operating expenses as part of the lease payment. The Company adopted an accounting policy to combine lease and non-lease components. Rent escalators based on indices and reimbursements of operating expenses that are not included in the lease rate are considered variable lease payments. Variable payments are recognized in the period earned. Lease income for the Company's operating leases, recognized for the three and nine months ended September 30, 2024 was $306.5 million and $932.7 million, respectively. Lease income for the Company's operating leases, recognized for the three and nine months ended September 30, 2023 was $333.3 million and $987.1 million, respectively.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Future lease payments under the non-cancelable operating leases, excluding any reimbursements and one sales-type lease, as of September 30, 2024, were as follows:
| Dollars in thousands | OPERATING | |||||||
| 2024 | $ | |||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| 2029 and thereafter | ||||||||
| $ | ||||||||
Lessee Accounting
The Company is obligated, as the lessee, under operating lease agreements consisting primarily of the Company’s ground leases. As of September 30, 2024, the Company had 217 properties totaling 16.3 million square feet that were held under ground leases. Some of the Company's ground lease renewal terms are based on fixed rent renewal terms, and others have market rent renewal terms. These ground leases typically have initial terms of 40 to 99 years with expiration dates through 2119. Any rental increases related to the Company’s ground leases are generally stated in the lease or based on CPI. The Company had 73 prepaid ground leases as of September 30, 2024. The amortization of the prepaid rent, included in the operating lease right-of-use asset, represented approximately $0.3 million and $0.3 million of the Company's rental expense for the three months ended September 30, 2024 and 2023, respectively, and $1.0 million and $1.0 million for the nine months ended September 30, 2024 and 2023, respectively.
The Company’s future lease payments (primarily for its 144 non-prepaid ground leases) as of September 30, 2024, were as follows:
| Dollars in thousands | OPERATING | FINANCING | ||||||
| 2024 | $ | $ | ||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| 2029 and thereafter | ||||||||
| Total undiscounted lease payments | ||||||||
| Discount | ( | ( | ||||||
| Lease liabilities | $ | $ | ||||||
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
The following table provides details of the Company's total lease expense for the three and nine months ended September 30, 2024 and 2023:
| THREE MONTHS ENDED September 30, | NINE MONTHS ENDED September 30, | |||||||||||||
| Dollars in thousands | 2024 | 2023 | 2024 | 2023 | ||||||||||
| Operating lease cost | ||||||||||||||
| Operating lease expense | $ | $ | $ | $ | ||||||||||
| Variable lease expense | ||||||||||||||
| Finance lease cost | ||||||||||||||
| Amortization of right-of-use assets | ||||||||||||||
| Interest on lease liabilities | ||||||||||||||
| Total lease expense | $ | $ | $ | $ | ||||||||||
| Other information | ||||||||||||||
| Operating cash flows outflows related to operating leases | $ | $ | $ | $ | ||||||||||
| Operating cash flows outflows related to financing leases | $ | $ | $ | $ | ||||||||||
| Financing cash flows outflows related to financing leases | $ | $ | $ | $ | ||||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | $ | $ | $ | ||||||||||
| Weighted-average years remaining lease term (excluding renewal options) - operating leases | ||||||||||||||
| Weighted-average years remaining lease term (excluding renewal options) - finance leases | ||||||||||||||
| Weighted-average discount rate - operating leases | % | % | ||||||||||||
| Weighted-average discount rate - finance leases | % | % | ||||||||||||
Note 4. Notes and Bonds Payable
The table below details the Company’s notes and bonds payable as of September 30, 2024, and December 31, 2023.
| MATURITY DATE | BALANCE 1 AS OF | EFFECTIVE INTEREST RATE as of 9/30/2024 | ||||||||||||
| Dollars in thousands | 9/30/2024 | 12/31/2023 | ||||||||||||
$ | 10/25 | $ | $ | % | ||||||||||
$ | 5/25 | % | ||||||||||||
$ | 7/25 | % | ||||||||||||
$ | 10/25 | % | ||||||||||||
$ | 6/26 | % | ||||||||||||
$ | 7/27 | % | ||||||||||||
$ | 1/28 | % | ||||||||||||
| Senior Notes due 2025 | 5/25 | % | ||||||||||||
Senior Notes due 2026 | 8/26 | % | ||||||||||||
| Senior Notes due 2027 | 7/27 | % | ||||||||||||
| Senior Notes due 2028 | 1/28 | % | ||||||||||||
| Senior Notes due 2030 | 2/30 | % | ||||||||||||
| Senior Notes due 2030 | 3/30 | % | ||||||||||||
| Senior Notes due 2031 | 3/31 | % | ||||||||||||
| Senior Notes due 2031 | 3/31 | % | ||||||||||||
Mortgage notes payable | 9/24-12/26 | |||||||||||||
| $ | $ | |||||||||||||
1Balance is presented net of discounts and issuance costs and inclusive of premiums, where applicable.
2As of September 30, 2024, the Company had $1.3 billion available to be drawn on its $1.5 billion Unsecured Credit Facility.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
3In April 2024, the Company exercised its option to extend the maturity date for one year to May 2025 for a fee of approximately $0.3 million.
4In June 2024, the Company repaid $100 million of the initial $350 million Unsecured Term Loan and exercised its second option to extend the maturity date for one year to July 2025 for a fee of approximately $0.3 million.
Changes in Debt Structure
On January 6, 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.
On February 1, 2024, 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. The mortgage note encumbered a 40,324 square foot property in Georgia.
On September 1, 2024, the Company repaid in full at maturity a mortgage note payable bearing interest at a rate of 4.15 % per annum with an outstanding principal balance of $6.9 million. The mortgage note encumbered a 64,143 square foot property in Minnesota.
Note 5. Derivative Financial Instruments
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.
For derivatives designated, and that qualify, as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income (Loss) ("AOCI") and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.
As of September 30, 2024, the Company had 15 outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
| AMOUNT | WEIGHTED AVERAGE RATE | |||||||
| May 2026 | $ | % | ||||||
| June 2026 | % | |||||||
| December 2026 | % | |||||||
| June 2027 | % | |||||||
| December 2027 | % | |||||||
| $ | % | |||||||
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet
The table below presents the fair value of the Company's derivative financial instruments and their classification on the Condensed Consolidated Balance Sheet as of September 30, 2024.
| BALANCE AT SEPTEMBER 30, 2024 | ||||||||
| In thousands | BALANCE SHEET LOCATION | FAIR VALUE | ||||||
| Derivatives designated as hedging instruments | ||||||||
| Interest rate swaps | Other liabilities | $ | ( | |||||
| Interest rate swaps | Other assets | $ | ||||||
| Total derivatives designated as hedging instruments | $ | ( | ||||||
Tabular Disclosure of the Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income (Loss)
The table below presents the effect of cash flow hedge accounting on AOCI during the three and nine months ended September 30, 2024 and 2023 related to the Company's outstanding interest rate swaps.
| (GAIN)/LOSS RECOGNIZED IN AOCI ON DERIVATIVE three months ended September 30, | (GAIN)/LOSS RECLASSIFIED FROM AOCI INTO INCOME three months ended September 30, | ||||||||||||||||
| In thousands | 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Interest rate swaps | $ | $ | ( | Interest expense | $ | ( | $ | ( | |||||||||
| Settled treasury hedges | Interest expense | ||||||||||||||||
| Settled interest rate swaps | Interest expense | ||||||||||||||||
| $ | $ | ( | Total interest expense | $ | ( | $ | ( | ||||||||||
| (GAIN)/LOSS RECOGNIZED IN AOCI ON DERIVATIVE nine months ended September 30, | (GAIN)/LOSS RECLASSIFIED FROM AOCI INTO INCOME nine months ended September 30, | ||||||||||||||||
| In thousands | 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Interest rate swaps | $ | ( | $ | ( | Interest expense | $ | ( | $ | ( | ||||||||
| Settled treasury hedges | Interest expense | ||||||||||||||||
| Settled interest rate swaps | Interest expense | ||||||||||||||||
| $ | ( | $ | ( | Total interest expense | $ | ( | $ | ( | |||||||||
The Company estimates that an additional $1.5 million related to active interest rate swaps will be reclassified from AOCI as an increase to interest expense over the next 12 months, and that an additional $0.5 million related to settled interest rate swaps will be amortized from AOCI as an increase to interest expense over the next 12 months.
Credit-risk-related Contingent Features
The Company's agreements with each of its derivative counterparties contain a cross-default provision under which the Company could be declared in default of its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender should the Company default on the indebtedness.
As of September 30, 2024, the fair value of derivatives in a net liability position including accrued interest but excluding any adjustment for nonperformance risk related to these agreements was $3.3 million. As of September 30, 2024, the Company had not posted any collateral related to these agreements and was not in breach of any agreement.
Note 6. Commitments and Contingencies
Legal Proceedings
From time to time, the Company is involved in litigation arising in the ordinary course of business. The Company is not aware of any pending or threatened litigation that, if resolved against the Company, would have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
19
Development and Redevelopment Activity
For the nine months ended September 30, 2024, the Company invested $58.7 million and $17.7 million toward active development and redevelopment of properties, respectively, and $34.6 million toward recently completed development and redevelopment projects.
Note 7. Stockholders' Equity
Common Stock
The following table provides a reconciliation of the beginning and ending shares of common stock outstanding for the nine months ended September 30, 2024 and the twelve months ended December 31, 2023:
| NINE MONTHS ENDED SEPTEMBER 30, 2024 | TWELVE MONTHS ENDED DECEMBER 31, 2023 | |||||||
| Balance, beginning of period | ||||||||
| Issuance of common stock | ||||||||
| Conversion of OP units to common stock | ||||||||
| Shares Repurchased | ( | |||||||
| Non-vested share-based awards, net of withheld shares and forfeitures | ||||||||
| Balance, end of period | ||||||||
Common Stock Dividends
During the nine months ended September 30, 2024, the Company declared and paid common stock dividends totaling $0.93 per share. On October 29, 2024, the Company declared a quarterly common stock dividend in the amount of $0.31 per share payable on November 27, 2024, to stockholders of record on November 12, 2024.
Common Stock Repurchases
On May 31, 2023, the Company’s Board of Directors authorized the repurchase of up to $500.0 million of outstanding shares of the Company’s common stock either in the open market or through privately negotiated transactions, subject to market conditions, regulatory constraints, and other customary conditions. In April 2024, the Company repurchased 2,966,764 shares of its common stock at a weighted average price of $14.07 for a total of $41.7 million under this authorization.
On April 30, 2024, the Company's Board of Directors authorized the repurchase of up to $500.0 million of outstanding shares of the Company's common stock, superseding the previous stock repurchase authorization. Under the Maryland General Corporation Law, outstanding shares of common stock acquired by a corporation become authorized but unissued shares, which may be re-issued. In May and June 2024, the Company repurchased an aggregate of 14,275,473 shares of its common stock at a weighted average price of $16.18 for a total of $231.0 million under this authorization.
During the third quarter of 2024, the Company repurchased an aggregate of 8,492,851 shares of its common stock at a weighted average price of $17.64 for a total of $149.8 million under this authorization. As of September 30, 2024, the Company was authorized to repurchase an additional $119.2 million of the Company's common stock.
Subsequent to September 30, 2024, the Company repurchased 1,380,000 shares of its common stock for a total of $24.2 million. On October 29, 2024, the Company's Board of Directors authorized the repurchase of up to $300.0 million of outstanding shares of the Company's common stock, superseding the previous stock repurchase authorization. The stock repurchase authorization expires on October 28, 2025, and the Company may suspend or terminate repurchases at any time without prior notice.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Earnings Per Common Share
The Company uses the two-class method of computing net earnings per common share. The Company's non-vested share-based awards are considered participating securities pursuant to the two-class method.
The following table sets forth the computation of basic and diluted earnings per common share for the three and nine months ended September 30, 2024, and 2023.
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, | |||||||||||||
| Dollars in thousands, except per share data | 2024 | 2023 | 2024 | 2023 | ||||||||||
| Weighted average common shares outstanding | ||||||||||||||
| Weighted average common shares outstanding | ||||||||||||||
| Non-vested shares | ( | ( | ( | ( | ||||||||||
| Weighted average common shares outstanding - basic | ||||||||||||||
| Weighted average common shares outstanding - basic | ||||||||||||||
| Dilutive effect of OP Units | ||||||||||||||
| Weighted average common shares outstanding - diluted | ||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
| Income allocated to participating securities | ( | ( | ( | ( | ||||||||||
| Loss attributable to non-controlling interest | ||||||||||||||
| Adjustment to loss attributable to non-controlling interest for legally outstanding restricted units | ( | ( | ( | ( | ||||||||||
| Net loss applicable to common stockholders - basic | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
| Basic earnings per common share - net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
| Diluted earnings per common share - net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
The effect of OP Units redeemable for 3,649,637 shares and 3,662,800 shares for the three and nine months ended September 30, 2024, respectively, were excluded from the calculation of diluted loss per common share because the effect was anti-dilutive due to the loss from continuing operations incurred during those periods.
Stock Incentive Plan
The Company's stock incentive plan ("Incentive Plan") permits the grant of incentive awards to its employees and directors in any of the following forms: options, stock appreciation rights, restricted stock, restricted or deferred stock units, performance awards, dividend equivalents, or other stock-based awards, including units in the OP.
Equity Incentive Plans
During the nine months ended September 30, 2024, the Company made the following equity awards:
•Restricted Stock
•During the first quarter of 2024, the Company granted non-vested stock awards to its named executive officers and other members of senior management with an aggregate grant date fair value of $5.6 million, which consisted of an aggregate of 361,712 non-vested shares with vesting periods ranging from to eight years .
•During the second quarter of 2024, the Company granted to independent directors an aggregate of 58,910 shares of non-vested stock with a grant date fair value of $0.9 million, and an aggregate of 45,982 LTIP Series D units with a grant date fair value of $0.7 million. The Company also granted non-vested stock to other members of senior management with an aggregate grant date fair value of $0.1 million, which consisted of an aggregate of 9,350 non-vested shares.
•Restricted Stock Units ("RSUs")
•On February 13, 2024, the Company granted an aggregate of 208,055 RSUs to members of senior management, with an aggregate grant date fair value of $3.5 million and a five-year vesting period.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
•On April 30, 2024, the Company granted an aggregate of 21,816 RSUs to members of senior management, with an aggregate grant date fair value of $0.3 million and a five-year vesting period.
Approximately 36 % of the RSUs vest based on relative total shareholder return ("TSR") and were valued using independent specialists. The Company utilized a Monte Carlo simulation to calculate the weighted average grant date fair value of $19.10 for the relative TSR component for the February 2024 grant using the following assumptions:
| Volatility | % | ||||
| Dividend assumption | Accrued | ||||
| Expected term | |||||
| Risk-free rate | % | ||||
| Stock price (per share) | $ | ||||
The remaining 64 % of the RSUs vest based upon certain operating performance conditions. With respect to the operating performance conditions of the February 13, 2024 grant, the grant date fair value was $15.22 based on the Company's share price on the date of grant.
•LTIP Series C Units
On February 13, 2024, the Company granted an aggregate of 906,044 LTIP Series C units ("LTIP-C units) in the OP to its named executive officers with three-year forward-looking performance targets, a five-year vesting period and an aggregate grant date fair value of $7.5 million.
Approximately 36 % of the LTIP-C units vest based on relative TSR and were valued using independent specialists. The Company utilized a Monte Carlo simulation to calculate the weighted average grant date fair value of $9.62 for the relative TSR component for the February 2024 grant using the following assumptions:
| Volatility | % | ||||
| Dividend assumption | Accrued | ||||
| Expected term | |||||
| Risk-free rate | % | ||||
| Stock price (per share) | $ | ||||
The remaining 64 % of the LTIP-C units vest based upon certain operating performance conditions. With respect to the operating performance conditions of the February 13, 2024 grant, the grant date fair value was $15.22 based on the Company's share price on the date of grant. The Company records amortization expense based on the probability of achieving certain operating performance conditions, which is evaluated throughout the performance period.
The following table represents the summary of non-vested share-based awards under the Incentive Plan for the three and nine months ended September 30, 2024 and 2023:
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, | |||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||
| Share-based awards, beginning of period | ||||||||||||||
Granted 1 | ||||||||||||||
| Vested | ( | ( | ( | ( | ||||||||||
| Change in awards based on performance assessment | ( | ( | ( | |||||||||||
| Forfeited | ( | ( | ||||||||||||
| Share-based awards, end of period | ||||||||||||||
1LTIP-C units are issued at the maximum possible value of the award and are reflected as such in this table until the performance conditions have been satisfied and the exact number of awards are determinable.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
The following table represents expected amortization of the Company's non-vested awards issued as of September 30, 2024:
| Dollars in millions | FUTURE AMORTIZATION of non-vested shares | ||||
| 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 and thereafter | |||||
| Total | $ | ||||
Note 8. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practical to estimate that value.
•Cash and cash equivalents - The carrying amount approximates fair value (level 1 inputs) due to the short-term maturity of these investments.
•Real estate notes receivable - Real estate notes receivable is recorded in other assets on the Company's Condensed Consolidated Balance Sheets. Fair value is estimated using cash flow analyses, based on current interest rates for similar types of arrangements using level 2 inputs in the hierarchy. However, the fair value of three notes receivable were determined utilizing the fair value of the receivables' collateral, as the receivables are collateral-dependent, and were classified as level 3 inputs in the hierarchy.
•Borrowings under the Unsecured Credit Facility and the Term Loans Due 2024 and 2026 - The carrying amount approximates fair value because the borrowings are based on variable market interest rates.
•Senior Notes and Mortgage Notes payable - The fair value of notes and bonds payable is estimated using cash flow analyses, based on the Company’s current interest rates for similar types of borrowing arrangements.
•Interest rate swap agreements - Interest rate swap agreements are recorded in other liabilities on the Company's Condensed Consolidated Balance Sheets at fair value. Fair value is estimated by utilizing pricing models, level 2 inputs, which consider forward yield curves and discount rates. See Note 5 for additional information.
The table below details the fair values and carrying values for notes and bonds payable and real estate notes receivable at September 30, 2024, and December 31, 2023:
| September 30, 2024 | December 31, 2023 | ||||||||||||||||
| Dollars in millions | CARRYING VALUE | FAIR VALUE | CARRYING VALUE | FAIR VALUE | |||||||||||||
Notes and bonds payable 1 | $ | $ | $ | $ | |||||||||||||
| Real estate notes receivable | $ | $ | $ | $ | |||||||||||||
1Level 2 – model-derived valuations in which significant inputs and significant value drivers are observable in active markets.
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Item 2. 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 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
This report and other materials the Company has filed or may file with the SEC, as well as information included in oral statements or other written statements made, or to be made, by management of the Company, contain, or will contain, disclosures that are “forward-looking statements.” Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “target,” “intend,” “plan,” “estimate,” “project,” “continue,” “should,” “could," "budget" and other comparable terms. These forward-looking statements are based on the Company's current plans, objectives, estimates, expectations and intentions and inherently involve significant risks and uncertainties. Such risks and uncertainties include, among other things, the following: the Company’s expected results may not be achieved; failure to realize the expected benefits of the Merger; risks related to future opportunities and plans for the Company, including the uncertainty of expected future financial performance and results of the Company; the possibility that, if the Company does not achieve the perceived benefits of the Merger as rapidly or to the extent anticipated by financial analysts or investors, the market price of the Company’s common stock could decline; pandemics or other health crises; increases in interest rates; the availability and cost of capital at expected rates; competition for quality assets; negative developments in the operating results or financial condition of the Company's tenants, including, but not limited to, their ability to pay rent; the Company's ability to reposition or sell facilities with profitable results; the Company's ability to release space at similar rates as vacancies occur; the Company's ability to renew expiring leases; government regulations affecting tenants' Medicare and Medicaid reimbursement rates and operational requirements; unanticipated difficulties and/or expenditures relating to future acquisitions and developments; changes in rules or practices governing the Company's financial reporting; the Company may be required under purchase options to sell properties and may not be able to reinvest the proceeds from such sales at rates of return equal to the return received on the properties sold; uninsured or underinsured losses related to casualty or liability; the incurrence of impairment charges on its real estate properties or other assets; other legal and operational matters; and other risks and uncertainties affecting the Company, including those described from time to time under the caption “Risk Factors” and elsewhere in the Company’s filings and reports with the SEC, including the Company's Annual Report on Form 10-K for the year ended December 31, 2023. Moreover, other risks and uncertainties of which the Company is not currently aware may also affect the Company's forward-looking statements and may cause actual results and the timing of events to differ materially from those anticipated. The forward-looking statements made in this communication are made only as of the date hereof or as of the dates indicated in the forward-looking statements, even if they are subsequently made available by the Company on its website or otherwise. The Company undertakes no obligation to update or supplement any forward-looking statements to reflect actual results, new information, future events, changes in its expectations or other circumstances that exist after the date as of which the forward-looking statements were made, except as required by law.
Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in the Company’s filings and reports, including, without limitation, estimates and projections regarding the performance of development projects the Company is pursuing.
For a detailed discussion of the Company’s risk factors, please refer to the Company's filings with the SEC, including this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Liquidity and Capital Resources
Sources and Uses of Cash
The Company’s primary sources of cash include rent receipts from its real estate portfolio based on contractual arrangements with its tenants, proceeds from the sales of real estate properties, joint ventures, and proceeds from public or private debt or equity offerings. As of September 30, 2024, the Company had $1.3 billion available to be drawn on its unsecured credit facility ("Unsecured Credit Facility") and available cash.
The Company expects to continue to meet its liquidity needs, including funding additional investments, paying dividends, and funding debt service, through cash flows from operations and liquidity sources, including the Unsecured Credit Facility. Management believes that the Company's liquidity and sources of capital are adequate to
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satisfy its cash requirements. The Company cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to the Company in sufficient amounts to meet its liquidity needs.
Investing Activities
Cash flows provided by investing activities for the nine months ended September 30, 2024 were approximately $482.1 million. Below is a summary of the investing activities.
Dispositions
The Company disposed of or contributed to joint ventures 41 properties during the nine months ended September 30, 2024, for a total sales price of $851.7 million, generating gross proceeds of $739.2 million, net of joint venture contributions and secured financing. The following table details these dispositions for the nine months ended September 30, 2024:
| Dollars in thousands | Date Disposed | Sale Price | Square Footage | ||||||||
| Albany, NY | 4/1/24 | $ | 725 | 14,800 | |||||||
| San Angelo, TX | 4/12/24 | 5,085 | 24,580 | ||||||||
| Houston, TX | 5/20/24 | 250 | 37,040 | ||||||||
Multiple 1 | 5/23/24 | 284,348 | 556,274 | ||||||||
| Denver, CO | 5/30/24 | 19,000 | 37,130 | ||||||||
Austin, TX 1 | 6/6/24 | 54,858 | 129,879 | ||||||||
| Minneapolis, MN | 6/21/24 | 1,082 | 50,291 | ||||||||
Greensboro/Raleigh, NC 2 | 6/28/24 | 99,518 | 309,424 | ||||||||
| Albany, NY | 8/2/24 | 6,300 | 180,000 | ||||||||
| Charlotte, NC | 8/6/24 | 26,670 | 90,633 | ||||||||
| Charleston, SC | 8/13/24 | 14,500 | 46,711 | ||||||||
Multiple 1 | 8/23/24 | 118,000 | 266,782 | ||||||||
Multiple 3 | 8/27/24 | 177,250 | 473,003 | ||||||||
| Austin, TX | 9/13/24 | 42,281 | 76,246 | ||||||||
| Raleigh, NC | 9/26/24 | 1,813 | 5,934 | ||||||||
| Total | $ | 851,680 | $ | 2,298,727 | |||||||
1The 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, Houston, TX, Miami, FL, and Denver, CO; two medical outpatient properties in Los Angeles 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.
2The Company sold seven medical outpatient properties in Greensboro, NC and two medical outpatient properties in Raleigh, NC to a single buyer in a single transaction.
3The Company sold the following medical outpatient properties into a joint venture, retaining 20% ownership: one in each of Dallas, TX, San Antonio, TX and Atlanta, GA; and two in each of Nashville, TN and Denver, CO.
Subsequent to September 30, 2024, the Company disposed of the following properties:
| Dollars in thousands | Date Disposed | Sale Price | Square Footage | ||||||||
Houston, TX 1 | 10/3/24 | $ | 12,000 | 140,012 | |||||||
| Greensboro, NC | 10/9/24 | 12,514 | 35,373 | ||||||||
| Des Moines, IA | 10/15/24 | 31,750 | 95,486 | ||||||||
| Albany, NY | 10/15/24 | 9,500 | 80,676 | ||||||||
Salt Lake City, UT 2 | 10/24/24 | 30,712 | 112,192 | ||||||||
| Miami, FL | 10/25/24 | 36,789 | 102,186 | ||||||||
| Miami, FL | 10/25/24 | 17,767 | 60,761 | ||||||||
| Total | $ | 151,032 | $ | 626,686 | |||||||
1.The Company provided seller financing of approximately $9.6 million in connection with this sale.
2.The Company sold a medical outpatient property that was included in a consolidated joint venture in which the Company held a 63% ownership interest.
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Investment in Unconsolidated Joint Venture
During the nine months ended September 30, 2024, the Company's investment in two unconsolidated joint ventures in which it holds a 20% interest increased by $89.6 million and $21.3 million, respectively, relating to the Company's contribution of medical outpatient properties to the joint ventures.
Capital Expenditures
During the nine months ended September 30, 2024, the Company incurred capital costs totaling $223.7 million for the following:
•$76.4 million toward active development and redevelopment of properties;
•$34.6 million toward completed development and redevelopment of properties;
•$39.2 million toward first generation tenant improvements and planned capital expenditures for acquisitions;
•$48.8 million toward second generation tenant improvements; and
•$24.7 million toward building capital.
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 loan associated with the underlying project provided notice of foreclosure proceedings to the borrower. The borrower is in negotiations with a third party to provide financing that will repay the senior lender. 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. As of the date of these financial statements, the outstanding principal and interest on these loans had not been repaid.
During the second quarter of 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 $11.2 million.
See Note 1 to the Condensed Consolidated Financial Statements accompanying this report for more information about real estate notes receivable and allowance for credit losses.
Financing Activities
Cash flows used in financing activities for the nine months ended September 30, 2024 were approximately $845.3 million. See Notes 4 and 7 to the Condensed Consolidated Financial Statements accompanying this report for more information about capital markets and financing activities.
Debt Activity
As of September 30, 2024, the Company had outstanding interest rate derivatives totaling $1.1 billion to hedge the one-month term Secured Overnight Financing Rate ("SOFR"). The following table details the amount and rate of each swap (dollars in thousands):
| EXPIRATION DATE | 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 | % | |||||
| $ | 1,075,000 | 3.92 | % | |||||
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Changes in Debt Structure
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. The mortgage note encumbered a 40,324 square foot property in Georgia.
During the second quarter of 2024, the Company repaid $100 million of the $350 million Unsecured Term Loan and exercised its second option to extend the maturity date for one year to July 2025 for a fee of approximately $0.3 million. During the third quarter of 2024, the Company repaid an additional $150 million of the Unsecured Term Loan. In October 2024, the Company repaid the remaining $100 million outstanding of the Unsecured Term Loan.
During the third quarter of 2024, the Company repaid in full at maturity, a mortgage note payable bearing interest at a rate of 4.15% per annum with an outstanding principal balance of $6.9 million. The mortgage note encumbered a 64,143 square foot property in Minnesota.
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 98.5% 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 decreased from $372.5 million for the nine months ended September 30, 2023 to $363.6 million for the nine months ended September 30, 2024. Items impacting cash flows from operations include, but are not limited to, cash generated from property operations, interest payments and the timing of 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. The income from the new investments or reduction in interest expense could be less than the income from properties sold which would adversely affect the Company's results of operations and cash flows.
Trends and Matters Impacting Operating Results
Management monitors factors and trends important to the Company and the REIT industry to gauge the potential impact on Company operations. In addition to the matters discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, some of the factors and trends that management believes may impact future operations of the Company are outlined below.
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.
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Expiring Leases
The Company expects that approximately 15% of its leases will expire each year in the ordinary course of business. There are 418 multi-tenant and single-tenant leases totaling 1.4 million square feet that will expire during the remainder of 2024. Approximately 69.7% of the 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.
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.
On October 25, 2024, leases for approximately 232,000 square feet in buildings in Florida and Massachusetts were rejected by Steward effective as of October 31, 2024, bringing the total leases rejected to 266,000 square feet. The total base rent associated with the leases rejected is approximately $0.6 million per month and the Company expects to cover operating expenses of an additional $0.2 million per month. The Company is in active discussions with Steward's subtenants to lease a portion of the rejected space.
The remaining Steward leases for approximately 83,000 square feet have not been rejected and are subject to continuing discussions. While the Company remains actively engaged in these discussions, significant uncertainty remains around whether these leases will be assumed or rejected.
Operating Expenses
The Company historically has experienced increases in property taxes throughout its portfolio as a result of increasing assessments and tax rates levied across the country. The Company continues its efforts to appeal property tax increases and manage the impact of the increases. In addition, the Company historically has incurred variability in portfolio utilities expense based on seasonality, with the first and third quarters usually reflecting greater amounts. The effects of these operating expense increases are mitigated in leases that have provisions for operating expense reimbursement. As of September 30, 2024, leases for approximately 92% of the Company's total leased square footage allow for some recovery of operating expenses, with approximately 29% having modified gross lease structures and approximately 63% having net lease structures.
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Purchase Options
Information about the Company's unexercised purchase options and the amount and basis for determination of the purchase price is detailed in the table below (dollars in thousands):
| YEAR EXERCISABLE | NUMBER OF PROPERTIES | GROSS REAL ESTATE INVESTMENT AS OF SEPTEMBER 30, 2024 1 | ||||||
Current 2 | 6 | $ | 111,393 | |||||
| 2025 | 5 | 99,799 | ||||||
| 2026 | 6 | 173,721 | ||||||
| 2027 | 4 | 110,660 | ||||||
| 2028 | 5 | 136,397 | ||||||
| 2029 | 3 | 81,844 | ||||||
| 2030 | — | — | ||||||
| 2031 | 4 | 106,779 | ||||||
| 2032 | 2 | 23,541 | ||||||
| 2033 | — | — | ||||||
2034 and thereafter 3 | 9 | 323,999 | ||||||
| Total | 44 | $ | 1,168,133 | |||||
1Includes three properties totaling $45.4 million with stated purchase prices or prices based on fixed capitalization rates.
2These purchase options have been exercisable for an average of 14.7 years.
3Includes two medical outpatient properties that are recorded in the line item Investment in financing receivable, net on the Company's Condensed Consolidated Balance Sheets.
Non-GAAP Financial Measures and Key Performance Indicators
Management considers certain non-GAAP financial measures and key performance indicators to be useful supplemental measures of the Company's operating performance. A non-GAAP financial measure is generally defined as one that purports to measure financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable measure determined in accordance with GAAP. Set forth below are descriptions of the non-GAAP financial measures management considers relevant to the Company's business and useful to investors, as well as reconciliations of these measures to the most directly comparable GAAP financial measures.
The non-GAAP financial measures and key performance indicators presented herein are not necessarily identical to those presented by other real estate companies due to the fact that not all real estate companies use the same definitions. These measures should not be considered as alternatives to net income, as indicators of the Company's financial performance, or as alternatives to cash flow from operating activities as measures of the Company's liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of the Company's needs. Management believes that in order to facilitate a clear understanding of the Company's historical consolidated operating results, these measures should be examined in conjunction with net income and cash flows from operations as presented in the Condensed Consolidated Financial Statements and other financial data included elsewhere in this Quarterly Report on Form 10-Q.
Funds from Operations ("FFO"), Normalized FFO and Funds Available for Distribution ("FAD")
FFO and FFO per share are operating performance measures adopted by the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as the most commonly accepted and reported measure of a REIT’s operating performance equal to “net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization, impairment, and after adjustments for unconsolidated partnerships and joint ventures.”
In addition to FFO, the Company presents Normalized FFO and FAD. Normalized FFO is presented by adding to FFO acquisition-related costs, acceleration of debt issuance costs, debt extinguishment costs and other Company-defined normalizing items to evaluate operating performance. FAD is presented by adding to Normalized FFO non-
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real estate depreciation and amortization, non-cash financing receivable amortization, loan origination cost amortization, deferred financing fees amortization, stock-based compensation expense and rent reserves, net; and subtracting maintenance capital expenditures, including second generation tenant improvements and leasing commissions paid and straight-line rent income, net of expense. The Company's definition of these terms may not be comparable to that of other real estate companies as they may have different methodologies for computing these amounts. FFO, Normalized FFO and FAD should not be considered as an alternative to net income as an indicator of the Company's financial performance or to cash flow from operating activities as an indicator of the Company's liquidity. FFO, Normalized FFO and FAD should be reviewed in connection with GAAP financial measures.
Management believes FFO, Normalized FFO, FFO per common share, Normalized FFO per share and FAD ("Non-GAAP Measures") provide an understanding of the operating performance of the Company’s properties without giving effect to certain significant non-cash items, primarily depreciation and amortization expense. Historical cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time. However, real estate values 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.
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The table below reconciles net income to FFO, Normalized FFO and FAD for the three and nine months ended September 30, 2024 and 2023:
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, | |||||||||||||
| Amounts in thousands, except per share data | 2024 | 2023 | 2024 | 2023 | ||||||||||
| Net loss attributable to common stockholders | $ | (93,023) | $ | (67,844) | $ | (547,639) | $ | (237,728) | ||||||
Net loss attributable to common stockholders per diluted share 1 | $ | (0.26) | $ | (0.18) | $ | (1.49) | $ | (0.63) | ||||||
| Gain on sales of real estate properties | (39,148) | (48,811) | (72,601) | (56,974) | ||||||||||
| Impairment of real estate properties | 37,632 | 56,873 | 174,486 | 138,314 | ||||||||||
| Real estate depreciation and amortization | 167,821 | 185,143 | 526,332 | 556,255 | ||||||||||
| Non-controlling loss from operating partnership units | (1,372) | (841) | (7,727) | (2,935) | ||||||||||
| Unconsolidated JV depreciation and amortization | 5,378 | 4,421 | 14,764 | 13,674 | ||||||||||
| FFO adjustments | $ | 170,311 | $ | 196,785 | $ | 635,254 | $ | 648,334 | ||||||
FFO adjustments per common share - diluted | $ | 0.47 | $ | 0.51 | $ | 1.70 | $ | 1.69 | ||||||
| FFO attributable to common stockholders | $ | 77,288 | $ | 128,941 | $ | 87,615 | $ | 410,606 | ||||||
| FFO attributable to common stockholders per common share - diluted | $ | 0.21 | $ | 0.34 | $ | 0.23 | $ | 1.07 | ||||||
| Transaction costs | 719 | 769 | 1,545 | 1,725 | ||||||||||
| Merger-related costs | — | 7,450 | — | (3,366) | ||||||||||
| Lease intangible amortization | (10) | 213 | 294 | 600 | ||||||||||
| Non-routine legal costs/forfeited earnest money received | 306 | — | 771 | 275 | ||||||||||
| Debt financing costs | — | (62) | — | (62) | ||||||||||
| Restructuring and severance-related charges | 6,861 | — | 6,861 | — | ||||||||||
Credit losses and gains on other assets, net 2 | 46,600 | — | 55,125 | 8,599 | ||||||||||
| Impairment of goodwill | — | — | 250,530 | — | ||||||||||
| Merger-related fair value of debt instruments | 10,184 | 10,667 | 30,353 | 32,085 | ||||||||||
Unconsolidated JV normalizing items 3 | 101 | 90 | 277 | 300 | ||||||||||
| Normalized FFO adjustments | $ | 64,761 | $ | 19,127 | $ | 345,756 | $ | 40,156 | ||||||
Normalized FFO adjustments per common share - diluted | $ | 0.18 | $ | 0.05 | $ | 0.92 | $ | 0.10 | ||||||
| Normalized FFO attributable to common stockholders | $ | 142,049 | $ | 148,068 | $ | 433,371 | $ | 450,762 | ||||||
| Normalized FFO attributable to common stockholders per common share - diluted | $ | 0.39 | $ | 0.39 | $ | 1.16 | $ | 1.18 | ||||||
| Non-real estate depreciation and amortization | 276 | 475 | 1,075 | 1,881 | ||||||||||
Non-cash interest amortization, net 4 | 1,319 | 1,402 | 3,862 | 3,703 | ||||||||||
| Rent reserves, net | (27) | 442 | 1,083 | 1,759 | ||||||||||
| Straight-line rent, net | (5,771) | (8,470) | (20,203) | (24,720) | ||||||||||
| Stock-based compensation | 4,064 | 2,556 | 11,008 | 10,224 | ||||||||||
Unconsolidated JV non-cash items 5 | (376) | (231) | (646) | (828) | ||||||||||
| Normalized FFO adjusted for non-cash items | $ | 141,534 | $ | 144,242 | $ | 429,550 | $ | 442,781 | ||||||
| 2nd generation TI | (16,951) | (21,248) | (49,443) | (47,366) | ||||||||||
| Leasing commissions paid | (10,266) | (8,907) | (35,493) | (21,413) | ||||||||||
| Building capital | (7,389) | (14,354) | (25,587) | (31,949) | ||||||||||
| FAD | $ | 106,928 | $ | 99,733 | $ | 319,027 | $ | 342,053 | ||||||
FFO weighted average common shares outstanding - diluted 6 | 363,370 | 383,428 | 374,414 | 383,390 | ||||||||||
1Potential common shares are not included in diluted earnings per share when a loss exists as the effect would be antidilutive.
2For the nine months ended September 30, 2024, includes a $5.1 million gain on sale of corporate assets included in "Gains on sales of real estate and other assets" on the Statement of Operations, a $2.2 million straight line rent reversed included in "Rental income" on the Statement of Operations, and a $58.0 million credit loss reserve on three notes receivable included in "Impairment of real estate properties and credit loss reserves" on the Statement of Operations. 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 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.
3Includes the Company's proportionate share of lease intangible amortization related to unconsolidated joint ventures.
4Includes the amortization of deferred financing costs, discounts and premiums, and non-cash financing receivable amortization.
5Includes the Company's proportionate share of straight-line rent, net related to unconsolidated joint ventures.
6The Company utilizes the treasury stock method which includes the dilutive effect of nonvested share-based awards outstanding of 760,552 and 432,597, respectively, for the three months ended September 30, 2024 and 2023, and the dilutive impact of 3,649,637 and 3,662,800 OP units outstanding for the three and nine months ended September 30, 2024, respectively.
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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 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 nine months ended September 30, 2024 and 2023:
| NUMBER OF PROPERTIES | GROSS INVESTMENT at September 30, 2024 | SAME STORE CASH NOI for the nine months ended September 30, | ||||||||||||
| Dollars in thousands | 2024 | 2023 | ||||||||||||
| Same store properties | 579 | $ | 11,450,154 | $ | 526,130 | $ | 511,834 | |||||||
| Joint venture same store properties | 29 | 321,109 | $ | 13,175 | $ | 12,645 | ||||||||
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 nine months ended September 30, 2024 and 2023:
Reconciliation of Same Store Cash NOI
| SAME STORE RECONCILIATION | ||||||||
| NINE MONTHS ENDED SEPTEMBER 30, | ||||||||
| Dollars in thousands | 2024 | 2023 | ||||||
| Net loss | $ | (555,692) | $ | (240,408) | ||||
| Other expense | 589,933 | 281,846 | ||||||
| General and administrative expense | 48,913 | 43,796 | ||||||
| Depreciation and amortization expense | 514,821 | 550,661 | ||||||
Other expenses 1 | 16,388 | 8,513 | ||||||
| Straight-line rent, net | (17,971) | (24,720) | ||||||
| Joint venture properties | 16,939 | 14,418 | ||||||
Other revenue 2 | (20,773) | (12,171) | ||||||
| Cash NOI | 592,558 | 621,935 | ||||||
| Cash NOI not included in same store | (53,253) | (97,456) | ||||||
| Same store cash NOI | 539,305 | 524,479 | ||||||
| Same store joint venture properties | (13,175) | (12,645) | ||||||
| Same store cash NOI (excluding JVs) | $ | 526,130 | $ | 511,834 | ||||
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.
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Reconciliation of Same Store Properties
| AS OF SEPTEMBER 30, 2024 | ||||||||||||||
| Dollars and square feet in thousands | PROPERTY COUNT | GROSS INVESTMENT 1 | SQUARE FEET | OCCUPANCY | ||||||||||
Same store properties | 579 | $ | 11,450,154 | 33,298 | 89.9 | % | ||||||||
| Joint venture same store properties | 29 | 321,109 | 1,636 | 89.8 | % | |||||||||
| Wholly owned and joint venture acquisitions | 25 | 171,013 | 1,622 | 94.8 | % | |||||||||
| Development completions | 3 | 97,988 | 329 | 65.7 | % | |||||||||
| Redevelopments | 21 | 478,346 | 1,639 | 57.6 | % | |||||||||
| Planned dispositions | 3 | 48,470 | 144 | 26.4 | % | |||||||||
| Total | 660 | $ | 12,567,080 | 38,668 | 88.3 | % | ||||||||
| Joint venture properties | 55 | 461,748 | 3,263 | 89.1 | % | |||||||||
| Total owned real estate properties | 605 | $ | 12,105,332 | 35,405 | 88.3 | % | ||||||||
1Excludes assets held for sale, construction in progress, land held for development, corporate property and financing lease right-of-use assets unrelated to an imputed lease arrangement as a result of a sale leaseback transaction.
Results of Operations
Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023
The Company’s results of operations for the three months ended September 30, 2024, compared to the same period in 2023 were impacted by acquisitions, developments, dispositions, gains on sale, and capital markets transactions.
Revenues
Rental income decreased $26.8 million, or 8.1%, for the three months ended September 30, 2024 compared to the prior year period. This decrease is primarily comprised of the following:
•Dispositions in 2023 and 2024 resulted in a decrease of $30.0 million.
•Acquisitions in 2023 resulted in an increase of $0.1 million.
•Leasing activity, including contractual rent increases, resulted in an increase of $3.1 million.
Expenses
Property operating expenses decreased $11.4 million, or 8.7%, for the three months ended September 30, 2024 compared to the prior year period primarily as a result of the following activity:
•Dispositions in 2023 and 2024 resulted in a decrease of $10.9 million.
•Acquisitions in 2023 resulted in an increase of $0.1 million.
•Increases in portfolio operating expenses as follows:
◦Leasing commissions expense of $1.4 million; and
◦Utilities expense of $1.3 million.
•Decreases in portfolio operating expenses as follows:
◦Property taxes of $1.6 million;
◦Maintenance and repair expense of $0.7 million;
◦Compensation expense of $0.5 million; and
◦Janitorial expense of $0.5 million.
General and administrative expenses increased approximately $6.7 million, or 50.2%, for the three months ended September 30, 2024 compared to the prior year period primarily as a result of the following activity:
•Increases from the following expenses:
◦Restructuring and severance-related charges of $6.2 million.
◦Non-cash compensation incentive expense of $1.6 million.
◦Cash incentive compensation expense of $0.1 million.
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◦Legal and other administrative costs of $0.2 million.
•Decreases in the following expenses:
◦Payroll and payroll related expenses of approximately $0.7 million.
◦Travel expenses of $0.7 million.
There were no merger-related costs for the three months ended September 30, 2024. Merger-related costs for the three months ended September 30, 2023, included legal and consulting services.
Depreciation and amortization expense decreased $19.8 million, or 10.8%, for the three months ended September 30, 2024 compared to the prior year period primarily as a result of the following activity:
•Various building and tenant improvement expenditures resulted in an increase of $9.9 million.
•Dispositions in 2023 and 2024 resulted in a decrease of $13.2 million.
•Assets that became fully depreciated resulted in a decrease of $16.6 million.
•Acquisitions in 2023 resulted in an increase of $0.1 million.
Other Income (Expense)
Gains on sale of real estate properties and other assets
In the third quarter of 2024, the Company recognized gains on sale of real estate properties and other assets of approximately $39.3 million. In the third quarter of 2023, the Company recognized gains on sale of real estate properties of approximately $48.8 million.
Interest expense
Interest expense decreased $5.7 million, or 8.5%, for the three months ended September 30, 2024 compared to the prior year period. The components of interest expense are as follows:
| THREE MONTHS ENDED SEPTEMBER 30, | CHANGE | |||||||||||||
| Dollars in thousands | 2024 | 2023 | $ | % | ||||||||||
| Contractual interest | $ | 49,307 | $ | 53,911 | $ | (4,604) | (8.5) | % | ||||||
| Net discount/premium accretion | 10,327 | 9,785 | 542 | 5.5 | % | |||||||||
| Debt issuance costs amortization | 1,227 | 1,338 | (111) | (8.3) | % | |||||||||
| Amortization of interest rate swap settlement | 42 | 42 | — | — | % | |||||||||
| Amortization of treasury hedge settlement | 107 | 107 | — | — | % | |||||||||
| Fair value derivative | — | 988 | (988) | (100.0) | % | |||||||||
| Interest cost capitalization | (1,295) | (795) | (500) | 62.9 | % | |||||||||
| Interest on lease liabilities | 934 | 928 | 6 | 0.6 | % | |||||||||
| Total interest expense | $ | 60,649 | $ | 66,304 | $ | (5,655) | (8.5) | % | ||||||
Contractual interest expense decreased $4.6 million, or 8.5%, for the three months ended September 30, 2024 compared to the prior year period primarily as a result of the following activity:
•The Unsecured Term Loans accounted for a decrease of approximately $1.9 million.
•The Unsecured Credit Facility accounted for a decrease of approximately $3.9 million as a result of a decreased weighted average balance outstanding.
•Active interest rate derivatives accounted for a decrease of $0.5 million, while expired interest rate derivatives accounted for an increase of $2.1 million.
•Mortgage note repayments, net of assumptions, accounted for a decrease of approximately $0.4 million.
Impairment of real estate properties and credit loss reserves
In the third quarter of 2024, the Company recognized impairments totaling $10.8 million on 13 properties sold and $26.8 million on 12 properties with changes in the expected holding periods. In addition, the Company recorded $46.8 million in credit loss reserves relating to notes receivable. In the third quarter of 2023, the Company
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recognized impairments totaling $56.9 million primarily as a result of the sale of two properties, the classification of 12 properties as held for sale, and changes in the expected holding period of six properties.
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 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, 2024 Compared to Nine Months Ended September 30, 2023
The Company’s results of operations for the nine months ended September 30, 2024, compared to the same period in 2023 were impacted by acquisitions, developments, dispositions, gains on sale, and capital markets transactions.
Revenues
Rental income decreased $54.4 million, or 5.5%, for the nine months ended September 30, 2024 compared to the prior year period. This decrease is primarily comprised of the following:
•Dispositions in 2023 and 2024 resulted in a decrease of $61.9 million.
•Acquisitions in 2023 resulted in an increase of $1.6 million.
•Leasing activity, including contractual rent increases, resulted in an increase of $12.1 million.
•Reversed revenue related to the Steward bankruptcy resulted in a decrease of $6.2 million, including straight-line rent of $2.7 million.
Expenses
Property operating expenses decreased $20.0 million, or 5.3%, for the nine months ended September 30, 2024 compared to the prior year period primarily as a result of the following activity:
•Dispositions in 2023 and 2024 resulted in a decrease of $23.5 million.
•Acquisitions in 2023 resulted in an increase of $0.6 million.
•Increases in portfolio operating expenses as follows:
◦Leasing commission, administrative, and other legal expenses of $3.9 million;
◦Utilities expense of $2.1 million;
◦Janitorial expense of $0.4 million; and
◦Security expense of $0.3 million.
•Decreases in portfolio operating expenses as follows:
◦Property tax expense of $2.4 million;
◦Maintenance and repair expense of $0.7 million; and
◦Compensation expense of $0.7 million.
General and administrative expenses increased approximately $5.1 million, or 11.7%, for the nine months ended September 30, 2024, compared to the prior year period primarily as a result of the following activity:
•Increase in restructuring and severance-related charges of $6.2 million
•Increase in non-cash compensation incentive expense of $1.4 million.
•Decrease in payroll and payroll related expenses of approximately $1.0 million.
•Other decreases including travel, legal and other administrative costs of $1.5 million.
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There were no merger-related costs for the nine months ended September 30, 2024. Merger-related costs for the nine months ended September 30, 2023, included legal and consulting fees, offset by a refund related to state transfer taxes.
Depreciation and amortization expense decreased $35.8 million, or 6.5%, for the nine months ended September 30, 2024 compared to the prior year period primarily as a result of the following activity:
•Dispositions in 2023 and 2024 resulted in a decrease of $39.0 million.
•Acquisitions in 2023 resulted in an increase of $0.8 million.
•Various building and tenant improvement expenditures resulted in an increase of $31.6 million.
•Assets that became fully depreciated resulted in a decrease of $29.2 million.
Other Income (Expense)
Gains on sale of real estate properties and other assets
Gains on the sale of real estate properties and other assets for the nine months ended September 30, 2024 and 2023 totaled $77.7 million and $57.0 million, respectively.
Interest expense
Interest expense decreased $11.2 million, or 5.8%, for the nine months ended September 30, 2024, compared to the prior year period. The components of interest expense are as follows:
| NINE MONTHS ENDED SEPTEMBER 30, | CHANGE | |||||||||||||
| Dollars in thousands | 2024 | 2023 | $ | % | ||||||||||
| Contractual interest | $ | 149,712 | $ | 157,443 | $ | (7,731) | (4.9) | % | ||||||
| Net discount/premium accretion | 30,592 | 29,025 | 1,567 | 5.4 | % | |||||||||
| Debt issuance costs amortization | 3,619 | 4,376 | (757) | (17.3) | % | |||||||||
| Amortization of interest rate swap settlement | 126 | 126 | — | — | % | |||||||||
| Amortization of treasury hedge settlement | 320 | 320 | — | — | % | |||||||||
| Fair value derivative | 187 | 3,414 | (3,227) | (94.5) | % | |||||||||
| Interest cost capitalization | (3,211) | (2,077) | (1,134) | 54.6 | % | |||||||||
| Interest on lease liabilities | 2,814 | 2,770 | 44 | 1.6 | % | |||||||||
| Total interest expense | $ | 184,159 | $ | 195,397 | $ | (11,238) | (5.8) | % | ||||||
Contractual interest expense decreased $7.7 million, or 4.9%, for the nine months ended September 30, 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 $2.5 million.
•The Unsecured Credit Facility accounted for a decrease of approximately $11.1 million as a result of a decreased weighted average balance outstanding.
•Active interest rate derivatives accounted for a decrease of $4.1 million, while expired interest rate derivatives accounted for an increase of $6.1 million.
•Mortgage note repayments, net of assumptions, accounted for a decrease of approximately $1.1 million.
Impairment of real estate properties and credit loss reserves
During the nine months ended September 30, 2024, the Company recognized impairments totaling $174.5 million on 28 properties sold and 30 properties with changes in the expected holding periods, including one property reclassified to held for sale. In addition, the Company recorded $58.0 million in credit loss reserves relates to notes receivable. 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 with changes in the expected holding periods. In addition, the Company recorded $5.2 million in credit loss reserves related to notes receivable. See Note 1 to the Condensed Consolidated Financial Statements accompanying this report for more details regarding the Company's notes receivable and credit loss reserves.
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Impairment of Goodwill
During the three months ended March 31, 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 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 2 to the Condensed Consolidated Financial Statements accompanying this report for more details regarding the Company's unconsolidated joint ventures.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk in the form of changing interest rates on its debt and mortgage notes. Management uses regular monitoring of market conditions and analysis techniques to manage this risk. During the nine months ended September 30, 2024, there were no material changes in the quantitative and qualitative disclosures about market risks presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports it files or submits under the Exchange Act.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is, from time to time, involved in litigation arising in the ordinary course of business. The Company is not aware of any pending or threatened litigation that, if resolved against the Company, would have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
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Item 1A. Risk Factors
In addition to the other information set forth in this report and the risk factor discussed below, an investor should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, which could materially affect the Company’s business, financial condition or future results. The risks, as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, are not the only risks facing the Company. Additional risks and uncertainties not currently known to management or that management currently deems immaterial also may materially adversely affect the Company’s business, financial condition, operating results or cash flows.
Risk Factors Relating to the Company
Operational Risks
The Company's results of operations have been and will continue to be impacted by the Steward Health bankruptcy.
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, accounting for approximately 2.0% of the Company’s rental revenue. 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.
On October 25, 2024, leases for approximately 232,000 square feet in buildings in Florida and Massachusetts were rejected by Steward effective as of October 31, 2024, bringing the total leases rejected to 266,000 square feet. The total base rent associated with the leases rejected is approximately $0.6 million per month and the Company expects to cover operating expenses of an additional $0.2 million per month. There can be no assurances that the Company will be able to re-let this leased space.
The remaining Steward leases for approximately 83,000 square feet are subject to continuing discussions with Steward and its hospital purchaser. While the Company remains actively engaged in these discussions, significant uncertainty remains around whether these leases will be assumed or rejected.
The Company will pursue claims for outstanding rent of $2.8 million against Steward in the bankruptcy court. However, there can be no assurance that the Company will recover unpaid rent from Steward.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the nine months ended September 30, 2024, the Company repurchased shares of its common stock as follows:
| PERIOD | TOTAL NUMBER OF SHARES PURCHASED (1) (2) | AVERAGE PRICE PAID per share | TOTAL NUMBER OF SHARES purchased as part of publicly announced plans or programs (2) | MAXIMUM NUMBER (or Approximate DOLLAR VALUE) OF SHARES that may yet be purchased under the plans or programs (2) | ||||||||||
May 31, 2023 Authorized Shares | $ | 500,000,000 | ||||||||||||
January 1 - January 31 | — | $ | — | — | 500,000,000 | |||||||||
February 1 - February 29 | 8,228 | 16.31 | — | 500,000,000 | ||||||||||
March 1 - March 31 | — | — | — | 500,000,000 | ||||||||||
April 1 - April 30 (3) | 2,966,764 | 14.07 | 2,966,764 | 458,191,783 | ||||||||||
| April 30, 2024 Authorized Shares | 500,000,000 | |||||||||||||
May 1 - May 31 (3) | 7,536,692 | 15.94 | 7,536,692 | 379,829,237 | ||||||||||
June 1 - June 30 (3) | 6,738,781 | 16.44 | 6,738,781 | 269,040,536 | ||||||||||
| July 1 - July 31 | 1,296,985 | 16.82 | 1,296,985 | 247,227,143 | ||||||||||
| August 1 - August 31 | 3,055,197 | 17.56 | 3,055,197 | 193,585,544 | ||||||||||
| September 1 - September 30 | 4,140,669 | 17.97 | 4,140,669 | 119,193,407 | ||||||||||
| Total | 25,743,316 | $ | 16.42 | 25,735,088 | $ | 119,193,407 | ||||||||
1Share purchases in February 2024 represent shares of Company common stock withheld and cancelled to satisfy employee tax withholding obligations payable upon the vesting of non-vested shares.
2On May 31, 2023, the Company's Board of Directors authorized the repurchase of up to $500 million of outstanding shares of the Company's common stock either in the open market or through privately negotiated transactions, subject to market conditions, regulatory constraints, and other customary conditions. On April 30, 2024, the Company's Board of Directors authorized the repurchase of up to $500 million of outstanding shares of the Company's common stock, superseding the previous stock repurchase authorization. The stock repurchase authorization expires on April 29, 2025. The Company may suspend repurchases or terminate the authorization at any time without prior notice. The Company is not obligated under this authorization to repurchase any specific number of shares.
3Repurchases of common stock in April 2024 were made under the May 31, 2023 $500 million stock repurchase authorization. All repurchases of common stock made after April 30, 2024, were repurchased under the April 30, 2024 $500 million stock repurchase authorization. As of September 30, 2024, the Company was authorized to repurchase an additional $119 million of the Company's common stock.
Item 5. Other Information
During the nine months ended September 30, 2024, no director or officer of the Company adopted terminated
Item 6. Exhibits
| EXHIBIT | DESCRIPTION | |||||||
| Exhibit 3.1 | ||||||||
| Exhibit 3.2 | ||||||||
| Exhibit 3.3 | ||||||||
| Exhibit 3.4 | ||||||||
| Exhibit 10.1 | ||||||||
| Exhibit 10.2 | ||||||||
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| Exhibit 10.3 | ||||||||
| Exhibit 10.4 | ||||||||
| Exhibit 101.INS | The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| Exhibit 101.SCH | XBRL Taxonomy Extension Schema Document (furnished electronically herewith) | |||||||
| Exhibit 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document (furnished electronically herewith) | |||||||
| Exhibit 101.LAB | XBRL Taxonomy Extension Labels Linkbase Document (furnished electronically herewith) | |||||||
| Exhibit 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document (furnished electronically herewith) | |||||||
| Exhibit 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document (furnished electronically herewith) | |||||||
| Exhibit 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | |||||||
1 Filed as an exhibit to the Company's (File No. 001-35568) Quarterly Report on Form 10-Q filed with the SEC on August 8, 2023, and hereby incorporated by reference.
2 Filed as an exhibit to Legacy HTA's (File No. 001-35568) Current Report on Form 8-K filed with the SEC on April 29, 2020, and hereby incorporated by reference.
3 Filed as an exhibit to the Company's (File No. 001-35568) Current Report on Form 8-K filed with the SEC on July 26, 2022, and hereby incorporated by reference.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| HEALTHCARE REALTY TRUST INCORPORATED | ||||||||
| By: | /s/ AUSTEN B. HELFRICH | |||||||
| Austen B. Helfrich | ||||||||
| Interim Chief Financial Officer | ||||||||
| October 30, 2024 | ||||||||
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