Healthcare Realty Trust Incorporated

30/10/2024 | Press release | Distributed by Public on 30/10/2024 09:33

Quarterly Report for Quarter Ending September 30, 2024 (Form 10-Q)

hr-20240930
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: September 30, 2024
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)
HEALTHCARE REALTY TRUST INCORPORATED
(Exact name of Registrant as specified in its charter)
Maryland 20-4738467
(State or other jurisdiction of Incorporation or organization) (I.R.S. Employer Identification No.)
3310 West End Avenue, Suite 700
Nashville, Tennessee37203
(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
Class A Common Stock, $0.01 par value per share HR New York Stock Exchange
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.
☒ Yes ☐ 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).
☒ Yes ☐ 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.
☒ Large accelerated filer ☐ 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 354,388,216shares of Common Stock outstanding.
HEALTHCARE REALTY TRUST INCORPORATED
FORM 10-Q
September 30, 2024
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1
Financial Statements
1
Condensed Consolidated Balance Sheets
1
Condensed Consolidated Statements of Operations
2
Condensed Consolidated Statements of Comprehensive Loss
3
Condensed Consolidated Statements of Equity and Redeemable Non-Controlling Interests
4
Condensed Consolidated Statements of Cash Flows
6
Notes to the Condensed Consolidated Financial Statements
8
Item 2
Management's Discussion and Analysis of Financial Condition and Results of Operations
24
Item 3
Quantitative and Qualitative Disclosures about Market Risk
37
Item 4
Controls and Procedures
37
PART II - OTHER INFORMATION
Item 1
Legal Proceedings
37
Item 1A
Risk Factors
38
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
38
Item 5 Other Information
39
Item 6
Exhibits
39
SIGNATURE
41
Table of Contents
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 $ 1,195,116 $ 1,343,265
Buildings and improvements 10,074,504 10,881,373
Lease intangibles 718,343 836,302
Personal property 9,246 12,718
Investment in financing receivable, net 123,045 122,602
Financing lease right-of-use assets 77,728 82,209
Construction in progress 125,944 60,727
Land held for development 52,408 59,871
Total real estate properties 12,376,334 13,399,067
Less accumulated depreciation and amortization (2,478,544) (2,226,853)
Total real estate properties, net 9,897,790 11,172,214
Cash and cash equivalents 22,801 25,699
Assets held for sale, net 156,218 8,834
Operating lease right-of-use assets 259,013 275,975
Investments in unconsolidated joint ventures 417,084 311,511
Goodwill - 250,530
Other assets, net 491,679 592,368
Total assets $ 11,244,585 $ 12,637,131
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Notes and bonds payable $ 4,957,796 $ 4,994,859
Accounts payable and accrued liabilities 197,428 211,994
Liabilities of assets held for sale 7,919 295
Operating lease liabilities 229,925 229,714
Financing lease liabilities 71,887 74,503
Other liabilities 180,283 202,984
Total liabilities 5,645,238 5,714,349
Commitments and contingencies
Redeemable non-controlling interests 3,875 3,868
Stockholders' equity
Preferred stock, $.01 par value per share; 200,000 shares authorized; none issued and outstanding
- -
Class A Common stock, $.01 par value per share; 1,000,000 shares authorized; 355,834 and 380,964 shares issued and outstanding at September 30, 2024, and December 31, 2023, respectively
3,558 3,810
Additional paid-in capital 9,198,004 9,602,592
Accumulated other comprehensive loss (16,963) (10,741)
Cumulative net income attributable to common stockholders 481,155 1,028,794
Cumulative dividends (4,150,328) (3,801,793)
Total stockholders' equity 5,515,426 6,822,662
Non-controlling interest 80,046 96,252
Total equity 5,595,472 6,918,914
Total liabilities and equity $ 11,244,585 $ 12,637,131
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.
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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 $ 306,499 $ 333,335 $ 932,710 $ 987,109
Interest income 3,904 4,264 12,307 12,711
Other operating 5,020 4,661 13,533 13,508
315,423 342,260 958,550 1,013,328
Expenses
Property operating 120,232 131,639 359,030 379,074
General and administrative 20,124 13,396 48,913 43,796
Transaction costs 719 769 1,545 1,725
Merger-related costs - 7,450 - (3,366)
Depreciation and amortization 163,226 182,989 514,821 550,661
304,301 336,243 924,309 971,890
Other income (expense)
Gain on sales of real estate properties and other assets 39,310 48,811 77,670 56,974
Interest expense (60,649) (66,304) (184,159) (195,397)
Gain on extinguishment of debt - 62 - 62
Impairment of real estate properties and credit loss reserves (84,394) (56,873) (232,450) (143,510)
Impairment of goodwill - - (250,530) -
Equity income (loss) from unconsolidated joint ventures 208 (456) (360) (1,253)
Interest and other (expense) income, net (132) 139 (104) 1,278
(105,657) (74,621) (589,933) (281,846)
Net loss $ (94,535) $ (68,604) $ (555,692) $ (240,408)
Net loss attributable to non-controlling interests 1,512 760 8,053 2,680
Net loss attributable to common stockholders $ (93,023) $ (67,844) $ (547,639) $ (237,728)
Basic earnings per common share $ (0.26) $ (0.18) $ (1.49) $ (0.63)
Diluted earnings per common share $ (0.26) $ (0.18) $ (1.49) $ (0.63)
Weighted average common shares outstanding - basic 358,960 378,925 370,254 378,886
Weighted average common shares outstanding - diluted 358,960 378,925 370,254 378,886
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.
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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 $ (94,535) $ (68,604) $ (555,692) $ (240,408)
Other comprehensive income (loss)
Interest rate derivatives
Reclassification adjustments for gains included in interest expense (3,641) (4,168) (11,169) (9,874)
(Losses) gains arising during the period on interest rate swaps (20,662) 12,016 4,839 24,999
(24,303) 7,848 (6,330) 15,125
Comprehensive loss (118,838) (60,756) (562,022) (225,283)
Less: comprehensive loss attributable to non-controlling interests 1,866 663 8,161 2,494
Comprehensive loss attributable to common stockholders $ (116,972) $ (60,093) $ (553,861) $ (222,789)
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.
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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 $ 3,643 $ 9,340,028 $ 6,986 $ 574,178 $ (4,037,693) $ 5,887,142 $ 83,675 $ 5,970,817 $ 3,875
Share-based compensation - 7,908 - - - 7,908 - 7,908 -
Common stock repurchases (85) (149,932) - - - (150,017) - (150,017) -
Redemption of non-controlling interest - - - - - - (625) (625) -
Net loss - - - (93,023) - (93,023) (1,512) (94,535) -
Reclassification adjustments for gains included in net income (interest expense)
 		- - (3,588) - - (3,588) (53) (3,641) -
Losses arising during the period on interest rate swaps
 		- - (20,361) - - (20,361) (301) (20,662) -
Dividends to common stockholders and distributions to non-controlling interest holders ($0.31 per share)
- - - - (112,635) (112,635) (1,138) (113,773) -
Balance at September 30, 2024 $ 3,558 $ 9,198,004 $ (16,963) $ 481,155 $ (4,150,328) $ 5,515,426 $ 80,046 $ 5,595,472 $ 3,875
Common
Stock 		Additional
Paid-In
Capital 		Accumulated
Other
Comprehensive
Income (Loss) 		Cumulative
Net Income 		Cumulative
Dividends 		Total
Stockholders'
Equity 		Non-controlling Interests Total
Equity 		Redeemable Non-controlling Interests
Balance at June 30, 2023 $ 3,808 $ 9,595,033 $ 9,328 $ 1,137,171 $ (3,565,941) $ 7,179,399 $ 104,018 $ 7,283,417 $ 2,487
Issuance of common stock, net of issuance costs - 33 - - - 33 - 33 -
Common stock redemptions - 8 - - - 8 - 8 -
Share-based compensation 1 2,555 - - - 2,556 - 2,556 -
Net loss - - - (67,844) - (67,844) (760) (68,604) -
Reclassification adjustments for gains included in net income (interest expense)
 		- - (4,118) - - (4,118) (50) (4,168) -
Gains arising during the period on interest rate swaps
 		- - 11,869 - - 11,869 147 12,016 -
Contributions from redeemable non-controlling interests - - - - - - - - 710
Adjustments to redemption value of redeemable non-controlling interests - - - - - - - - (2)
Dividends to common stockholders and distributions to non-controlling interest holders ($0.31 per share)
- - - - (118,203) (118,203) (1,467) (119,670) -
Balance at September 30, 2023 $ 3,809 $ 9,597,629 $ 17,079 $ 1,069,327 $ (3,684,144) $ 7,003,700 $ 101,888 $ 7,105,588 $ 3,195
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.
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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 $ 3,810 $ 9,602,592 $ (10,741) $ 1,028,794 $ (3,801,793) $ 6,822,662 $ 96,252 $ 6,918,914 $ 3,868
Issuance of common stock, net of issuance costs - 104 - - - 104 - 104 -
Common stock redemptions - (138) - - - (138) - (138) -
Conversion of OP Units to common stock 2 3,410 - - - 3,412 (3,412) - -
Share-based compensation 3 14,849 - - - 14,852 - 14,852 -
Common stock repurchases (257) (422,813) - - - (423,070) - (423,070) -
Redemption of non-controlling interest - - - - - - (625) (625) -
Net loss - - - (547,639) - (547,639) (8,053) (555,692) -
Reclassification adjustments for gains included in net income (interest expense)
 		- - (11,012) - - (11,012) (157) (11,169) -
Gains arising during the period on interest rate swaps
 		- - 4,790 - - 4,790 49 4,839 -
Contributions from redeemable non-controlling interests - - - - - - - - 13
Adjustments to redemption value of redeemable non-controlling interests - - - - - - - - (6)
Dividends to common stockholders and distributions to non-controlling interest holders (0.93 per share)
- - - - (348,535) (348,535) (4,008) (352,543) -
Balance at September 30, 2024 $ 3,558 $ 9,198,004 $ (16,963) $ 481,155 $ (4,150,328) $ 5,515,426 $ 80,046 $ 5,595,472 $ 3,875
Common
Stock 		Additional
Paid-In
Capital 		Accumulated
Other
Comprehensive
Income (Loss) 		Cumulative
Net Income 		Cumulative
Dividends 		Total
Stockholders'
Equity 		Non-controlling Interests Total
Equity 		Redeemable Non-controlling Interests
Balance at December 31, 2022 $ 3,806 $ 9,587,637 $ 2,140 $ 1,307,055 $ (3,329,562) $ 7,571,076 $ 108,742 $ 7,679,818 $ 2,014
Issuance of common stock, net of issuance costs - 112 - - - 112 - 112 -
Common stock redemptions - (1,587) - - - (1,587) - (1,587) -
Share-based compensation 3 11,467 - - - 11,470 - 11,470 -
Net loss - - - (237,728) - (237,728) (2,680) (240,408) -
Reclassification adjustments for gains included in net income (interest expense)
 		- - (9,757) - - (9,757) (117) (9,874) -
Gains arising during the period on interest rate swaps
 		- - 24,696 - - 24,696 303 24,999 -
Contributions from redeemable non-controlling interests - - - - - - - - 1,210
Adjustments to redemption value of redeemable non-controlling interests - - - - - - - - (29)
Dividends to common stockholders and distributions to non-controlling interest holders (0.93 per share)
- - - - (354,582) (354,582) (4,360) (358,942) -
Balance at September 30, 2023 $ 3,809 $ 9,597,629 $ 17,079 $ 1,069,327 $ (3,684,144) $ 7,003,700 $ 101,888 $ 7,105,588 $ 3,195
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.
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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 $ (555,692) $ (240,408)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 514,821 550,661
Other amortization 35,051 33,822
Share-based compensation 14,852 11,470
Amortization of straight-line rent receivable (lessor) (20,935) (29,320)
Amortization of straight-line rent on operating leases (lessee) 2,963 4,600
Gain on sales of real estate properties and other assets (77,670) (56,974)
Gain on extinguishment of debt - (62)
Impairment of real estate properties and credit loss reserves 232,450 143,510
Impairment of goodwill 250,530 -
Equity loss from unconsolidated joint ventures 360 1,253
Distributions from unconsolidated joint ventures 4,946 4,366
Non-cash interest from financing and notes receivable (1,610) (1,067)
Changes in operating assets and liabilities:
Other assets, including right-of-use-assets (5,758) (34,632)
Accounts payable and accrued liabilities (27,925) (32,060)
Other liabilities (2,778) 17,345
Net cash provided by operating activities 363,605 372,504
INVESTING ACTIVITIES
Acquisitions of real estate - (48,106)
Development of real estate (51,336) (31,318)
Additional long-lived assets (186,742) (156,871)
Funding of mortgages and notes receivable (3,565) (14,597)
Investments in unconsolidated joint ventures - (3,824)
Investment in financing receivable (22) (310)
Contributions from redeemable non-controlling interests 13 710
Proceeds from sales of real estate properties and additional long-lived assets 722,940 366,779
Proceeds from notes receivable repayments 861 -
Net cash provided by investing activities 482,149 112,463
FINANCING ACTIVITIES
Net borrowings (repayments) on unsecured credit facility 206,000 (149,000)
Repayment on term loan (250,000) -
Repayments of notes and bonds payable (25,130) (11,988)
Dividends paid (348,064) (354,171)
Net proceeds from issuance of common stock 104 110
Common stock redemptions (321) (1,834)
Common stock repurchases (423,070) -
Distributions to non-controlling interest holders (3,612) (3,836)
Redemption of non-controlling interest (625) -
Debt issuance and assumption costs (563) (529)
Payments made on finance leases (13) (12)
Net cash used in financing activities (845,294) (521,260)
Increase (decrease) in cash and cash equivalents 460 (36,293)
Cash and cash equivalents at beginning of period 25,699 60,961
Cash and cash equivalents at end of period, including assets held for sale 26,159 24,668
Cash and cash equivalents held for sale (3,358) -
Cash and cash equivalents at end of period $ 22,801 $ 24,668
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Supplemental Cash Flow Information NINE MONTHS ENDED
September 30,
2024 2023
Interest paid $ 177,507 $ 185,402
Mortgage notes receivable taken in connection with sale of real estate $ - $ 45,000
Invoices accrued for construction, tenant improvements and other capitalized costs $ 49,886 $ 32,590
Mortgage note payable assumed in connection with acquisition of real estate, net $ - $ 5,284
Capitalized interest $ 3,211 $ 2,077
Contribution of real estate properties into unconsolidated joint venture $ 110,879 $ -
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.
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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 55real 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.
Any references to square footage or occupancy percentage, and any amounts derived from these values in these notes to the Company's Condensed Consolidated Financial Statements, are outside the scope of our independent registered public accounting firm's review.
Basis of Presentation
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
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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.
The OP is98.5%owned by the Company. Other holders of OP Units are considered to be non-controlling interest holders in the OP and their ownership interests are reflected as equity in the accompanying Condensed Consolidated Balance Sheets. Further, a portion of the earnings and losses of the OP are allocated to non-controlling interest holders based on their respective ownership percentages. Upon conversion of OP Units to common stock, any difference between the fair value of the common stock issued and the carrying value of the OP Units converted to common stock is recorded as a component of equity. As of September 30, 2024, there were approximately 5.3 million OP Units, or 1.5%of OP Units issued and outstanding, held by non-controlling interest holders. Additionally, the Company is the primary beneficiary of this VIE. Accordingly, the Company consolidates its interests in the OP.
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
$ 99,946
Cash and cash equivalents 162
Other assets, net
806
Assets held for sale, net
32,264
Total assets
$ 133,178
Liabilities:
Accrued expenses and other liabilities
$ 9,217
Liabilities held for sale, net
509
Total liabilities
$ 9,726
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 $ 20,500 $ 20,500
2021
Charlotte, NC 1
Notes receivable 7,285 7,332
2022
Texas 2
Joint venture 57,955 57,955
1Assumed mortgage notes receivable in connection with the Merger.
2Includes investments in seven properties.
As of September 30, 2024, the Company's unconsolidated joint venture arrangements were accounted for using the equity method of accounting as the Company exercised significant influence over but did not control these entities. See Note 2 below for more details regarding the Company's unconsolidated joint ventures.
Use of Estimates in the Condensed Consolidated Financial Statements
Preparation of the Condensed Consolidated Financial Statements in accordance with GAAP requires management to make estimates and assumptions that affect amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Actual results may differ from those estimates.
Redeemable Non-Controlling Interests
The Company accounts for redeemable equity securities in accordance with ASC Topic 480: Accounting for Redeemable Equity Instruments, which requires that equity securities redeemable at the option of the holder, not solely within our control, be classified outside permanent stockholders' equity. The Company classifies redeemable equity securities as redeemable non-controlling interests in the accompanying Condensed Consolidated Balance Sheets. Accordingly, the Company records the carrying amount at the greater of the initial carrying amount (increased or decreased for the non-controlling interest's share of net income or loss and distributions) or the redemption value. The Company measures the redemption value and records an adjustment to the carrying value of the equity securities as a component of redeemable non-controlling interest. As of September 30, 2024, the Company had redeemable non-controlling interests of $3.9 million.
Asset Impairment
The Company assesses the potential for impairment of identifiable, definite-lived, intangible assets and long-lived assets, including real estate properties, whenever the occurrence of an event or a change in circumstances indicates that the carrying value might not be fully recoverable. Indicators of impairment may include significant underperformance of an asset relative to historical or expected operating results; significant changes in the Company's use of assets or the strategy for its overall business; plans to sell an asset before its depreciable life has ended; the expiration of a significant portion of leases in a property; or significant negative economic trends or negative industry trends for the Company or its tenants. During the three and nine months ended September 30, 2024, the Company recognized real estate impairments totaling $37.6 million and $174.5 million, respectively, as a result of completed and planned disposition activity.
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
During the first quarter of 2024, the Company experienced a sustained decline in the price per share of its common stock, which was identified as an indicator of goodwill impairment. As a result, a goodwill evaluation was performed. As of the measurement date, the Company's current operations are carried out through a single reporting unit that had a carrying value of approximately $12.0 billion. The Company determined that the carrying value exceeded estimated fair value and therefore an impairment of goodwill was recorded. The Company recorded a $250.5 million full impairment of its goodwill, which is recorded as a non-cash charge in "Impairment of goodwill" in the Condensed Consolidated Statements of Operations.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Investments in Leases - Financing Receivables, Net
In accordance with ASC Topic 842: Leases, for transactions in which the Company enters into a contract to acquire an asset and leases it back to the seller (i.e., a sale leaseback transaction), control of the asset is not considered to have transferred when the seller-lessee has a purchase option. As a result, the Company does not recognize the underlying real estate asset but instead recognizes a financial asset in accordance with ASC Topic 310: Receivables.See below for additional information regarding the Company's financing receivables.
(dollars in thousands) ORIGINATION DATE LOCATION INTEREST RATE CARRYING VALUE as of SEPTEMBER 30, 2024
May 2021 Poway, CA 5.71% $ 115,683
November 2021 Columbus, OH 6.48% 7,362
$ 123,045
Real Estate Notes Receivable
Real estate notes receivable consists of mezzanine and other real estate loans, which are generally collateralized by a pledge of the borrower's ownership interest in the respective real estate owner, a mortgage or deed of trust, and/or corporate guarantees. Real estate notes receivable are intended to be held to maturity and are recorded at amortized cost, net of unamortized loan origination costs and fees and allowance for credit losses. As of September 30, 2024, real estate notes receivable, net, which are included in Other assets on the Company's Condensed Consolidated Balance Sheets, totaled $121.7 million.
(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 8.00 % $ 54,119 $ 54,119 $ 906 $ (51,958) $ (3,067) $ -
Arizona 12/21/2023 12/20/2026 9.00 % 6,000 6,000 36 - - 6,036
60,119 60,119 942 (51,958) (3,067) 6,036
Mortgage loans
Texas 1
6/30/2021 12/02/2024 7.00 % 31,150 31,150 551 (11,201) - 20,500
North Carolina 2
12/22/2021 12/22/2024 8.00 % 6,000 6,000 1,332 - (47) 7,285
Florida 5/17/2022 2/27/2026 6.00 % 65,000 35,721 179 - (29) 35,871
California 3/30/2023 3/29/2026 6.00 % 45,000 45,000 177 - - 45,177
Florida 12/28/2023 12/28/2026 9.00 % 7,700 6,839 - - - 6,839
154,850 124,710 2,239 (11,201) (76) 115,672
$ 214,969 $ 184,829 $ 3,181 $ (63,159) $ (3,143) $ 121,708
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 $ 5,196 $ -
Credit loss reserves 57,963 5,196
Allowance for credit losses, end of period $ 63,159 $ 5,196
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.
Revenue that is accounted for under ASC Topic 606 is segregated on the Company's Condensed Consolidated Statements of Operations in the Other operating line item. This line item includes parking income, management fee income and other miscellaneous income.Below is a detail of the amounts by category:
THREE MONTHS ENDED
September 30, 		NINE MONTHS ENDED
September 30,
in thousands 2024 2023 2024 2023
Type of Revenue
Parking income $ 2,363 $ 2,751 $ 7,372 $ 7,511
Management fee income/other1
2,657 1,910 6,161 5,997
$ 5,020 $ 4,661 $ 13,533 $ 13,508
1 Includes the recovery of certain expenses under the financing receivable as outlined in the management agreement.
The Company's major types of revenue that are accounted for under Topic 606 that are listed above are all accounted for as the performance obligation is satisfied. The performance obligations that are identified for each of these items are satisfied over time, and the Company recognizes revenue monthly based on this principle.
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.
The update is effective for annual reporting periods beginning after December 15, 2023, and interim periods beginning after December 15, 2024. Early adoption is permitted. At this time, the Company does not expect that the adoption of this ASU will have a material impact on its consolidated financial statements other than compliance with these new disclosure requirements, which will begin with the Company's Annual Report on Form 10-K for the year ending December 31, 2024.
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 $ 374,841 $ 327,245 $ 311,511 $ 327,248
New investment during the period 1
44,332 - 110,879 3,824
Equity income (loss) recognized during the period 208 (456) (360) (1,253)
Owner distributions (2,297) (1,336) (4,946) (4,366)
Investments in unconsolidated joint ventures, end of period $ 417,084 $ 325,453 $ 417,084 $ 325,453
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.
retained a 20% ownership interest. See 2024 "Real Estate Asset Dispositions" below for additional information. In 2023, there was an additional investment in an existing joint venture in which the Company retained a 40% ownership interest. The investment consisted of the Company's contribution of a property in Dallas, TX to the joint venture.
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 $ 725 $ (60) $ 665 $ 765 $ (82) $ (18) 14,800
San Angelo, TX 4/12/24 5,085 (128) 4,957 4,917 66 (26) 24,580
Houston, TX 5/20/24 250 (9) 241 713 (520) 48 37,040
Multiple 1
5/23/24 284,348 (14,270) 270,078 254,176 25,836 (9,934) 556,274
Denver, CO 5/30/24 19,000 (628) 18,372 18,522 165 (315) 37,130
Austin, TX 1
6/6/24 54,858 (1,575) 53,283 27,964 623 24,696 129,879
Minneapolis, MN 6/21/24 1,082 (144) 938 303 43 592 50,291
Greensboro/Raleigh, NC 2
6/28/24 99,518 (2,835) 96,683 86,810 906 8,967 309,424
Albany, NY 8/2/24 6,300 (847) 5,453 5,528 486 (561) 180,000
Charlotte, NC 8/6/24 26,670 (395) 26,275 14,853 613 10,809 90,633
Charleston, SC 8/13/24 14,500 (589) 13,911 11,488 1 2,422 46,711
Multiple 1
8/23/24 118,000 (8,615) 109,385 113,956 548 (5,119) 266,782
Multiple 3
8/27/24 177,250 (7,085) 170,165 169,545 5,363 (4,743) 473,003
Austin, TX 9/13/24 42,281 (1,257) 41,024 14,561 425 26,038 76,246
Raleigh, NC 9/26/24 1,813 (27) 1,786 1,694 50 42 5,934
Total dispositions $ 851,680 $ (38,464) $ 813,216 $ 725,795 $ 34,523 $ 52,898 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, 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% ownership: two in each of Nashville, TN and Denver, CO; one in each of Dallas, TX, San Antonio, TX and Atlanta, GA. Sale price and square footage reflect the total sale price paid by the joint venture and total square footage of the property. The net proceeds to the Company related to these dispositions totaled $148.9 million.
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 $ 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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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 $ 38,469 $ 1,850
Building and improvements 117,241 6,779
Lease intangibles 16,716 1,017
Personal property 65 -
Land held for development 5,000 -
177,491 9,646
Accumulated depreciation (33,997) (913)
Real estate assets held for sale, net 1
143,494 8,733
Cash and cash equivalents 3,358 -
Operating lease right-of-use assets 3,160 -
Other assets, net 6,206 101
Assets held for sale, net $ 156,218 $ 8,834
Accounts payable and accrued liabilities $ 3,494 $ 23
Operating lease liabilities 2,741 -
Other liabilities 1,684 272
Liabilities of assets held for sale $ 7,919 $ 295
Non-controlling interest held for sale $ 11,147 $ -
1Net real estate assets held for sale include the impact of $34.6 million of impairment charges for the nine months ended September 30, 2024.
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 $ 218,129
2025 836,208
2026 748,331
2027 629,408
2028 513,690
2029 and thereafter 1,683,468
$ 4,629,234
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 $ 2,930 $ 816
2025 12,769 2,070
2026 12,900 2,106
2027 13,103 2,145
2028 13,239 2,177
2029 and thereafter 688,868 385,382
Total undiscounted lease payments 743,809 394,696
Discount (513,884) (322,809)
Lease liabilities $ 229,925 $ 71,887
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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 $ 4,484 $ 5,312 $ 13,549 $ 15,748
Variable lease expense 1,240 2,417 3,782 6,788
Finance lease cost
Amortization of right-of-use assets 383 387 1,162 1,161
Interest on lease liabilities 934 928 2,814 2,770
Total lease expense $ 7,041 $ 9,044 $ 21,307 $ 26,467
Other information
Operating cash flows outflows related to operating leases $ 3,513 $ 5,281 $ 12,441 $ 16,475
Operating cash flows outflows related to financing leases $ 504 $ 524 $ 1,658 $ 1,592
Financing cash flows outflows related to financing leases $ 4 $ 7 $ 13 $ 12
Right-of-use assets obtained in exchange for new operating lease liabilities $ 1,294 $ - $ 3,855 $ -
Weighted-average years remaining lease term (excluding renewal options) - operating leases 44.5 47.5
Weighted-average years remaining lease term (excluding renewal options) - finance leases 58.0 58.2
Weighted-average discount rate - operating leases 5.7 % 5.8 %
Weighted-average discount rate - finance leases 5.0 % 5.0 %
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 1AS OF
EFFECTIVE INTEREST RATE
as of 9/30/2024
Dollars in thousands 9/30/2024 12/31/2023
$1.5 billion Unsecured Credit Facility 2
10/25 $ 206,000 $ - 5.79 %
$200 million Unsecured Term Loan 3
5/25 199,833 199,903 6.24 %
$350 million Unsecured Term Loan 4,5
7/25 99,740 349,798 6.24 %
$300 million Unsecured Term Loan
10/25 299,975 299,958 6.24 %
$150 million Unsecured Term Loan
6/26 149,753 149,643 6.24 %
$200 million Unsecured Term Loan
7/27 199,606 199,502 6.24 %
$300 million Unsecured Term Loan
1/28 298,603 298,288 6.24 %
Senior Notes due 2025 5/25 249,771 249,484 4.12 %
Senior Notes due 2026
8/26 584,836 579,017 4.94 %
Senior Notes due 2027 7/27 486,990 483,727 4.76 %
Senior Notes due 2028 1/28 297,877 297,429 3.85 %
Senior Notes due 2030 2/30 583,330 575,443 5.30 %
Senior Notes due 2030 3/30 297,086 296,780 2.72 %
Senior Notes due 2031 3/31 296,214 295,832 2.25 %
Senior Notes due 2031 3/31 662,719 649,521 5.13 %
Mortgage notes payable
9/24-12/26 45,463 70,534
3.57% - 6.88%
$ 4,957,796 $ 4,994,859
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 billionavailable to be drawn on its $1.5 billion Unsecured Credit Facility.
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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.
5In September 2024, the Company repaid an additional $150 million of the $350 million Unsecured Term Loan. In October 2024, the Company repaid the remaining $100 million outstanding on this loan.
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 40,324square 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 64,143square 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 $ 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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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 $ (16,847)
Interest rate swaps Other assets $ 2,094
Total derivatives designated as hedging instruments $ (14,753)
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 $ 20,662 $ (12,016) Interest expense $ (3,790) $ (4,317)
Settled treasury hedges - - Interest expense 107 107
Settled interest rate swaps - - Interest expense 42 42
$ 20,662 $ (12,016) Total interest expense $ (3,641) $ (4,168)
(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 $ (4,839) $ (24,999) Interest expense $ (11,615) $ (10,320)
Settled treasury hedges - - Interest expense 126 126
Settled interest rate swaps - - Interest expense 320 320
$ (4,839) $ (24,999) Total interest expense $ (11,169) $ (9,874)
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.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
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 380,964,433 380,589,894
Issuance of common stock 8,623 8,627
Conversion of OP units to common stock 194,767 190,544
Shares Repurchased (25,735,088) -
Non-vested share-based awards, net of withheld shares and forfeitures 401,648 175,368
Balance, end of period 355,834,383 380,964,433
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 360,981,496 380,857,560 372,230,619 380,828,004
Non-vested shares (2,021,666) (1,932,221) (1,976,421) (1,941,897)
Weighted average common shares outstanding - basic 358,959,830 378,925,339 370,254,198 378,886,107
Weighted average common shares outstanding - basic 358,959,830 378,925,339 370,254,198 378,886,107
Dilutive effect of OP Units - - - -
Weighted average common shares outstanding - diluted 358,959,830 378,925,339 370,254,198 378,886,107
Net loss $ (94,535) $ (68,604) $ (555,692) $ (240,408)
Income allocated to participating securities (560) (636) (2,452) (1,868)
Loss attributable to non-controlling interest 1,512 760 8,053 2,680
Adjustment to loss attributable to non-controlling interest for legally outstanding restricted units (549) (29) (2,560) (122)
Net loss applicable to common stockholders - basic $ (94,132) $ (68,509) $ (552,651) $ (239,718)
Basic earnings per common share - net loss $ (0.26) $ (0.18) $ (1.49) $ (0.63)
Diluted earnings per common share - net loss $ (0.26) $ (0.18) $ (1.49) $ (0.63)
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 threeto 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 28.0 %
Dividend assumption Accrued
Expected term 3 years
Risk-free rate 4.44 %
Stock price (per share) $15.22
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 28.0 %
Dividend assumption Accrued
Expected term 3 years
Risk-free rate 4.44 %
Stock price (per share) $15.22
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 4,085,059 2,923,018 2,615,562 2,090,060
Granted 1
- - 1,611,578 1,118,537
Vested (9,730) (11,664) (84,804) (188,070)
Change in awards based on performance assessment - (126,418) (47,202) (205,668)
Forfeited - - (19,805) (29,923)
Share-based awards, end of period 4,075,329 2,784,936 4,075,329 2,784,936
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 $ 3.6
2025 12.1
2026 9.2
2027 5.0
2028 and thereafter 2.7
Total $ 32.6
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
$ 4,957.8 $ 4,909.5 $ 4,994.9 $ 4,872.7
Real estate notes receivable $ 121.7 $ 118.2 $ 173.6 $ 172.5
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 approximately15% 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 millionwith 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 - diluted6
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 expenses1
16,388 8,513
Straight-line rent, net (17,971) (24,720)
Joint venture properties 16,939 14,418
Other revenue2
(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 or terminated a "Rule 10b5-1 trading agreement" or "non-Rule 10b5-1 trading agreement," as each term is defined in Item 408(a) of Regulation S-K.
Item 6. Exhibits
EXHIBIT DESCRIPTION
Exhibit 3.1
Exhibit 3.2
Exhibit 3.3
Exhibit 3.4
Exhibit 10.1
Employment agreement dated January 1, 2021 andAmendment No. 1 to Employment Agreement, dated October 1, 2024, between Austen B. Helfrich and Healthcare Realty Trust Incorporated(filed herewith).
Exhibit 10.2
Amendment No. 3 to Amended and Restated Employment Agreement, dated October 1, 2024, between Robert E. Hull and Healthcare Realty Trust Incorporated (filed herewith).
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Exhibit 10.3
Amendment No. 1 to Amended and Restated Employment Agreement, dated October 1, 2024, between Julie F. Wilson and Healthcare Realty Trust Incorporated (filed herewith).
Exhibit 10.4
Amended and Restated Employment Agreement, dated October 1, 2024, between Ryan E. Crowley and Healthcare Realty Trust Incorporated (filed herewith).
Exhibit 22
Subsidiary Issuers of Guaranteed Securities (filed herewith).
Exhibit 31.1
Certification of the Chief Executive Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Exhibit 31.2
Certification of the Chief Financial Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Exhibit 32
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
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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